Term papers writing service


Impact of fdi on economic growth in pakistan thesis

By now it is well recognised that FDI can significantly benefit the economy of the host country and this may be the reason that governments of many countries around the globe formulate strategies that attract foreign direct investment in their countries. In addition to the direct capital financing, FDI can benefit the host country through technology spill overs, human capital formation, creation of competitive business environment, enterprise development and integration of international trade.

Many international institutions, politicians and economists consider Foreign Direct Investment as a major tool of the economic growth of a country as well as the solution of economic issues.

Foreign Direct investment plays a major role in the economic expansion when there is a shortage of domestic savings.

It is not only an important source of capital inflows but also a major source of technology transfers in the host country. The capital inflows and technology transfer are considered as accelerators for economic growth, so foreign direct investment FDI is more likely to promote the economic growth of the host country. Technology transfer can be taken place in the host country through multinational firms while spill overs could be occurred by the interaction of domestic firms through the interaction of multinational firms with domestic firms, suppliers, customers and work force.

Therefore, FDI can have a positive impact on income. For instance, Aitken and Harrison states that the net impact of foreign direct impact on the host country is very small. Literature Review A substantial literature rationalises the influence of foreign direct investment on the economic growth of a developing country. The existing literature highlights the effects of foreign direct investment on the economic growth of a developing country particularly Pakistan. Lee and Tcha indicates that FDI is the most effective way to achieve economic growth.

Most of the authors consider FDI as a major engine of economic growth in a host country. InOrganisation of Economic Cooperation OECD reported the fact that FDI is considered as the only source of economic growth and modernisation for the countries with weak impact of fdi on economic growth in pakistan thesis.

Carkovic and Levine states that FDI is given a lot of importance by many governments, particularly the governments of developing countries treat FDI in a very special way. According to Hanson there are many examples of special treatment offered to foreign investors by the governments of the developing countries such as tax holidays, import duty exemptions, provision of land for facilities and some direct subsidies.

So, these are some common examples which have been seen to encourage foreign direct investment in the host countries. According to Ford et al countries have their own public agencies which are given task to attract foreign investments in the country by using public funds.

So, it shows that the governments are even ready to incur some costs to attract investments. Hill emphasized on the fact that foreign direct investment plays a positive role in the economic growth of the host country through transfer of capital, technology and management resources.

He further states that these resources have the potential to speed up the economic growth of the host country and the most notable thing is that these resources can only be transferred to the host country through FDI. Beside capital FDI brings several more benefits in the host country like employment, management resources, modern technology and competitive goods.

Balasubramanyam et al analysed the impact of foreign direct investment on the developing economies by using cross section and OLS regression. He found that FDI has a positive effect for those countries which have outwardly oriented trade policy but not for those countries which have inwardly trade policies.

Although, foreign direct investment is considered as the vehicle of the economic growth of the host country but some estimated benefits may prove vague if the host economy is not able to take advantage of the new technologies or know-how transferred from FDI.

Durham examined the effects of foreign direct investment FDI on economic growth using data on 80 countries. He founds that sometimes FDI has insignificant and adverse effects on the economic growth of the developing countries. He is of the view that the impact of FDI is dependent on the absorptive capacity of the host country. Zilinske states that the effects of foreign direct investment can be positive as well as negative. Carkovic and Levine analyses the impact of FDI on the economic growth and their study came up with the conclusion that foreign direct investment has adverse effects on the economic growth of the host country.

The environmental quality includes savings and financial development, trade openness, human capital development and technological development of the host country. So, the impact of foreign direct investment on the economic growth of the host country is still debatable. A large number of studies have been conducted so far to find out the effects of FDI on the economy but there is no consensus.

Some studies came up with the findings that FDI has positive impact on the economy while others with negative impact. Some studies have found that the impact of FDI depends on the absorptive capacity of the host country that includes political, economic and technological condition of the host country. A higher level of saving and investment is required to increase capital formation in developing countries but the developing countries like Pakistan lack the desired amount of domestic savings.

So, there is a gap between saving and desired level of investment which can be filled by external capital inflows.

Foreign direct investment is one of the important sources of capital inflows. Jawaid investigated the relationship between the foreign direct investment FDI and the economic growth of Pakistan over the period Khan examined the link between foreign direct investment, domestic financial sector and economic growth for Pakistan over the period to The empirical study is based on the bound testing approach of cointegration advanced by Pesaran, et al.

The results obtained from the empirical study suggest that FDI has a positive impact on economic growth both in the short-run and the long-run if the domestic financial system has achieved a certain level of development.

Moreover, the study suggests that better domestic conditions not only attract FDI but also helps in maximising the benefits of foreign direct investment.

By utilizing time series data fromthe study concluded that FDI, trade openness and domestic capital positively affect the economic growth. Higher FDI replaces obsolete technology by advanced technology and educates the labour force of the country.

Moreover, it is suggested that government should take some solid measures such as stabilizing the exchange rate in order to increase FDI in Pakistan. Tahir et al analysed the relationship between foreign remittances, foreign direct investment, foreign imports and economic growth by using time series econometric techniques covering the data over the time period of to The study found that foreign remittances and foreign direct investment have significantly positive role in the economic growth process of Pakistan.

Moreover, it is recommended that that policy makers should take appropriate measures to increase foreign remittances and FDI, so that long run economic growth could be achieved in the long run.

The results obtained from the study show that there exists a positive relationship between foreign direct investment and economic growth. The study came up with the recommendations that government should ensure political stability and enhanced domestic investment in order to attract more FDI in Pakistan. Falki investigated the impact of foreign direct investment on the economic growth of Pakistan by using production function based on the endogenous growth theory covering the period The results obtained from the study show that there is a negative and statistically insignificant relation between GDP and FDI inflows of Pakistan.

Atique et al analysed the impact of FDI on the economic growth of Pakistan under export regimes. The study concludes that the growth impact of FDI tends to be higher under an export promotion trade regime as compared to an import substitution regime by utilizing the data for Pakistan over the period — The study analysis time series data over the period of to for the following variables; Foreign Direct Investment FDIinflation rates, exchange rates and interest rates.

A descriptive survey research design is adopted in the research study. The summary of the statistics of all variables is given below in Table 1. There is a steady increase in the values of GDP over the past 25 years that means economic growth of Pakistan has been increasing for last 25 years.

The minimum value is calculated as USD The findings clearly indicate rising and falling trend in the values of FDI during the last 25 years. The value of standard deviation is calculated as The higher value of standard deviation indicates that there is a variation over the yearly values of foreign direct investment. Inflation Rate The findings on the inflation rate nominal values are shown in Table 1 above and Figure 3 below.

Inflation rate The findings in the Table 1 and Figure 3 given above indicate the trend of annual average inflation rate values over the time period of The minimum value of inflation is recorded as 2. The findings show that there is a rising and falling trend of the values of inflation rate with significant annual variations over the last 25 years.

Exchange Rate The findings on the exchange rate nominal values are shown in Table 1 above and Figure 4 below: Exchange Rate The findings as presented in Table 1 and figure 4 above indicate the trend of foreign exchange rate values of Pakistan relative to the US Dollar over the period of The minimum exchange rate value is calculated as The findings indicate that there is a rise impact of fdi on economic growth in pakistan thesis the values of exchange rate over the past period of 25 years.

Interest Rate The findings on the interest rate nominal values are shown in the Table 1 above and Figure 5 below: Interest rate The findings presented in the above Table 1 and Figure 5 indicate the trend of interest rate values over the period of The minimum interest rate value is calculated as 1.

The findings indicate fluctuating levels of interest rate values with annual variations over the last 25 years. The findings clearly indicate that there is rising and falling trend in the values of interest rate over the past 25 years. Model Specification To determine the relationship between foreign direct investment and economic growth in Pakistan, the study conducts multilinear regression analysis among the variables.

The regression model specification is as follows; 4. Multiple Regression Analysis The study conducts multiple regression analysis to determine the relationship between foreign direct investment and economic growth in Pakistan.

The findings of the study are presented in the tables below. Model Summary The four independent variables FDI, inflation rate, exchange rate, interest rate that were studied, indicate It means that other factors not included in this study contribute 3.

The F calculated value is greater than the F critical value which shows that the overall model was significant. According to the equation, by taking all the factors i. The findings of the data reveal that a unit increase in foreign direct investment FDI will lead to 3. Podrecca and Carmeci came up with the findings that investment is the most important determinant of economic growth as identified by neoclassical and endogenous growth models.

Cockcroft and Riddell and Meier found in their study that firms choose a location for investment because of the comparative advantage in terms of low inflation rates, availability of raw materials, good infrastructure, adequate labour force and low capital cost. Castilla found that employment generation is another positive impact of FDI. Ramirez found that FDI allows for technology transfer and specialized knowledge which in turns favours and increase in productivity.

Baracaldo that productive FDI usually results in long lasting and stable capital flows as they are invested in long term assets. Jawaid and Khan found in their studies that FDI has positive impact on the economic growth both in the short run and long run.

Conclusions and Recommendations The study aims to analyse the impact of foreign direct investment FDI on the economic growth of Pakistan over the period The study utilized correlation and multiple regression analysis to determine the impact of FDI on the economic growth of Pakistan.

The results of the study reveal that FDI has a positive impact on the economic growth of Pakistan. So finally, the findings of the study reveal that FDI positively affects the economic growth in Pakistan.

Therefore, the study recommends that government policy makers should bring reforms in the domestic market in order to attract more FDI in Pakistan. New York and Geneva, Does foreign direct investment always enhance economic growth? Kyklos, 56 4 ,