Advances in Management & Applied Economics , vol.3, no.

1, 2013, 35-45ISSN: 1792-7544 (print version), 1792-7552 (online)Scienpress Ltd

Impact of Foreign Direct Investment onEconomic Growth of Pakistan

Dr. Najia Saqib
1

, Maryam Masnoon
2

and Nabeel Rafique

3

Abstract Given contrasting evidence in the literature pertaining to the impact of ForeignDirect Investment on the host countrys economy, we take the case of Pakistanand test the said association for this nation. The data used for this study hasspanned over the period of 1981 till 2010. Besides FDI, four other variablesincluding Debt, Trade, Inflation and Domestic Investment have been included inthe study, to regress upon GDP of this country. The methodology to test theimpact of these variables on Pakistans economy has been limited to the leastsquares method. The co-integration of the variables has been ascertained throughapplication of Augmented Dickey Fuller Test and is found to hold in the long run.Our findings indicate that Pakistans economic performance is negatively affected by foreign investment while its domestic investment has benefitted its economy.Moreover, the nations debt, trade and inflation have found to have negativeimpact on its GDP

36 Impact of Foreign Direct Investment on Economic Growth of

Pakistan

Keywords:

Foreign direct investment, economic growth, Granger causality

38 Impact of Foreign Direct Investment on Economic Growth of Pakistan

[19] and Sylwester (2005) [20]. De Mello (1997) [21] argues that the direction of causality depends on the recipient countrys trade regime. Nair- Reichert andWeinhold (2001) [22] argue that the effect of FDI on growth is highlyheterogeneous across countries and this heterogeneity is more pronounced for more open economies.Therefore, in order to attract or channelize FDI in host country there is aneed for host country-specific study, its policy analysis. The policy regime,infrastructure situation / capital formation, technology status, labor educationstatus will be the determinants for the causality and effect of FDI and economicgrowth. 3 Data and Estimation The data for Pakistan is taken from two sources, both deemed reliable, StateBank of Pakistan and World Development Indicators. The time series data pertainsto years 1981 till 2010.GDP
t

=
0

+
1

FDI
t

+
2

D
t

+
3

GDS
t

+
4

INF
t

+
5

T
t

Table 1: Determinants of economic performance, panel data of PakistanVariables ExpectedSignProxy Data SourceDependant Variable:Economic PerformanceGDP Per Capita atPPP ($)WorldDevelopmentIndicatorsExplanatory variables:Foreign DirectInvestment FDI per Capita ($) State Bank of PakistanDebt Log of Total DebtServicesWorldDevelopmentIndicatorsGross DomesticInvestment + Gross DomesticSavings asPercentage of GDPWorldDevelopmentIndicatorsInflation Inflation, GDPDeflator WorldDevelopmentIndicatorsTrade Trade as percentageof GDPWorldDevelopmentIndicators
Source: Authors Expectatio

Rank Country/monetary authority 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Foreign exchange reserves Figures as of (Millions of US$) Dec 2012[1] People's Republic of China 3,311,590 1,268,125 Dec 2012[2] Japan 932,675 Nov 2012[2] Dec 2012[3] Dec 2012[4] Dec 2012[2] Dec 2012[5] Dec 2012[2] Nov 2012[2] Feb 2013[6] Jan 2013[2] Dec 2012[2] Jan 2013[2] Dec 2012[7] Dec 2012[2] Dec 2012[2] Dec 2012[2] Nov 2012[2] Jan 2013[2] Dec 2012[2]

626,800 537,618 531,275 Switzerland Republic of China (Taiwan) 403,170 373,148 Brazil 326,091 Republic of Korea 304,800 Hong Kong 294,994 India 259,307 Singapore Germany 250,603 190,500 Algeria 184,551 France 181,683 Italy 181,608 Thailand Mexico 168,286 United States 150,079 Malaysia 139,724

Eurozone Saudi Arabia Russia

Rank Country/monetary authority 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 United Kingdom Libya Turkey Indonesia Poland Denmark Philippines Israel Iran Canada Peru Iraq Netherlands Norway Sweden Spain Lebanon South Africa Australia Hungary Romania Czech Republic United Arab Emirates Nigeria Argentina Chile Colombia Macau Belgium Kuwait Kazakhstan Austria Qatar Venezuela Ukraine Portugal

Foreign exchange reserves Figures as of (Millions of US$) 134,261 Dec 2012[2] 130,300 Dec 2012[7] 119,167 Dec 2012[2] 112,781 Dec 2012[2] 108,900 Dec 2012[2] 89,704 Dec 2012[2] 85,760 Jan 2013[2] 75,647 Nov 2012[2] 69,860 Dec 2012[7] 68,222 Nov 2012[2] 65,210 Jan 2013[2] 61,840 Dec 2012[7] 54,816 Dec 2012[2] 54,593 Jan 2013[2] 52,301 Nov 2012[2] 51,730 Jan 2013[2] 51,200 Dec 2012[7] 50,812 Nov 2012[2] 48,168 Nov 2012[2] 46,977 Nov 2012[2] 46,724 Dec 2012[2] 44,761 Dec 2012[2] 43,770 Dec 2012[7] 47,400 Feb 2013[8] 42,530 Jan 2013[2] 41,640 Dec 2012[2] 36,998 Dec 2012[2] 34,030 Dec 2011[7] 30,776 Dec 2012[2] 29,260 Dec 2012[7] 28,289 Dec 2012[2] 27,213 Dec 2012[2] 25,970 Dec 2012[7] 25,230 Dec 2012[7] 24,546 Dec 2012[2] 22,660 Dec 2012[2]

Rank Country/monetary authority 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 Vietnam Bulgaria New Zealand Morocco Serbia Egypt Croatia Bolivia Pakistan Uruguay Finland Trinidad and Tobago Bangladesh Azerbaijan Jordan Lithuania Belarus Latvia Sri Lanka Greece Costa Rica Guatemala Paraguay Dominican Republic Iceland Cambodia Nepal El Salvador Mauritius Georgia Moldova Slovakia Honduras Kyrgyzstan Nicaragua Armenia

Foreign exchange reserves Figures as of (Millions of US$) 20,900 Dec 2012[7] 19,604 Nov 2012[2] 17,583 Dec 2012[2] 17,535 Dec 2012[2] 16,200 Dec 2012[7] 15,044 Nov 2012[2] 14,677 Nov 2012[2] 13,620 Dec 2012[9] 13,500 Dec 2012[7] 13,434 Nov 2012[2] 11,161 Nov 2012[2] 10,650 Dec 2012[7] 10,190 Dec 2012[7] 9,870 Dec 2012[7] 8,814 Dec 2012[2] 8,530 Dec 2012[2] 8,095 Dec 2012[2] 7,523 Dec 2012[2] 7,400 Dec 2012[7] 7,317 Jan 2013[2] 6,857 Dec 2012[2] 6,690 Dec 2012[2] 5,326 Dec 2012[7] 4,317 Dec 2012[7] 4,184 Dec 2012[2] 3,732 Dec 2012[7] 3,631 3,143 2,991 2,872 2,515 2,508 2,341 2,067 1,887 1,799 Dec 2012[7] Dec 2012[2] Nov 2012[2] Dec 2012[2] Dec 2012[2] Dec 2012[2] Nov 2012[2] Jan 2013[2] Dec 2012[2] Dec 2012[2]

Rank Country/monetary authority 92 93 94 95 96 97 98 Ireland Cyprus Luxembourg Slovenia Laos Malta Estonia

Foreign exchange reserves Figures as of (Millions of US$) 1,709 Dec 2012[2] 1,192 Dec 2012[2] 991 Dec 2012[2] 953 Dec 2012[2] 822 Dec 2012[7] 704 Dec 2012[2] 301 Dec 2012[2]