What Factors Lead to Affect Foreign Direct Investment in Pakistan? A Sector Level Empirical Investigation

Abstract

This study investigates the factors that lead to affect foreign direct investment (FDI), using Pooled data for five sectors namely, mining and quarrying, manufacturing, transport, storage and communication, construction and trade and commerce for 1972 to 2018 in Pakistan. This study also investigates that whether the determinants of FDI are same or different across sectors? To further analyze the role of policy variables, dummy for privatization and liberalization have been introduced. Using Autoregressive distributed lag model (ARDL), this study found the presence of long run relationship among variables. Further, the results of panel as well as individual time series regression suggest that in the long run, variables such as agglomeration, market size, market growth, domestic investment, labor productivity, financial performance, political instability, privatization and liberalization are deep determinants of FDI across sectors. Results also show that in the short run, only agglomeration, market size, market growth and dummy of political instability are significant variables. Moreover, the importance of policy variables (privatization and liberalization) cannot be denied. The result of this study recommends coherent and sound policy measures for further policy formulation of FDI inflows across sectors. With reference to policy formulation, special attention should be given to manufacturing sector-based infrastructure, research and development and outward looking export orientated policies to improve manufacturing sector performance. Political stability is most desirous phenomenon to attract FDI.