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INTERNATIONAL TRADE RESEARCH

IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONMIC GROWTH IN PAKISTAN

RAHIM KARIM
M.RASHID AMEER
ABDUL BARI
ABDUL BASIT

MUHAMMAD ALI JINNAH UNIVERSITY

FACULTY: SIR AFAQ ALI KHAN

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ABSTRACT:
Foreign direct investment (FDI) is an important factor of development in the developing
countries like Pakistan. In this study we are discussing the effect of FDI and other variables on
the Pakistan’s economy. This study contains annual data and time period cover from 1999 to
2015. The ordinary least square method use to find the effect of the variables on the GDP of
Pakistan. The variables which are taken in this research paper are FDI, labor force, trade
openness and exports.
Keywords: Foreign Direct Investment, Labor Force, Trade openness and Exports.

INTRODUCTION:
For developing countries FDI has become an important source of resource. FDI plays important
role as it increases the employment in the country, productivity also increases, and FDI also
boost up the exports in the country and transfer of technology. FDI also use for the payment of
loans and because of FDI in the end the human capital increases and living of standard rises in
the country.
NuzhatFalki (2009) from the last few decades the FDI is the great source of income for the
developing countries. As the FDI increases the investment in the country by which the FDI helps
to boost the economic growth in Pakistan. The FDI effect to increase in employment,
productivity, increase in exports and technology. The advantages of FDI is that it facilitate the
exertion and using of local raw material, it introduce new technique of management, access to
new technology, used for financing the deficit of current account and increases the human capital
stock.
Rabia Najaf and khakan Najaf (2015) In the past year we saw that the FDI was more in
dictatorship as in civilian government, it’s mean that foreigners more believe or trust on
dictatorship.
(Adeel Ahmad Dar, Hafiz Muhammad Ali Bhatti and Taj Muhammad) Pakistan is the liberal
economy. Pakistan can put all its foreign equity on the secondary sector. The primary sector get
jobs to 45% as labor but tertiary sector have large share 58% in Pakistan’s GDP.In 2003,
Pakistan primary sector growth rate was 3.3%, secondary sector was 3.5% and tertiary sector
growth rate was 3.7%. The Pakistan primary sector is characterized as the inefficient, low
productivity and few inducements. The secondary sector is characterized as the composed of
automotive, pharmaceuticals, infrastructure and textile and electronic components. The Pakistan
tertiary sector is characterized as they consist of financial services, trade, technology and gas and
oil exploration.
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INTERNATIONAL TRADE RESEARCH

COUNTRY AND SECTOR WISE FDI INFLOW IN PAKISTAN:

According to BOI (Board of Investment)
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LITERATURE REVIEW:
Many researchers study the relationship between GDP and FDI. (Arshad, Muhammad 2012)
calculates the relationship between GDP, FDI and trade in Pakistan. He takes the time period of
1965-2005. He applied auto-regressive model. The result of the study shows that both exports
and imports have effect on GDP but FDI have no effect on GDP in long run.
(Nuzhat 2009) study the impact of FDI with labor force, foreign owned capital and domestic
capital on Pakistan GDP. She used Ordinary least square method. The result was that the FDI has
a negative relationship with GDP.
(Wasantha 2003) said that the increases in FDI will increase the GDP growth in positive way.
But in Srilanka increase in FDI did not improves because of corruption, political instability, lack
of infrastructure, lack of good governance, lack of human capital.
(Sohail, Amir and Azeem 2014) studied the impact of FDI on the economic growth of Pakistan.
They were using the data from 2000-2010 and they used Two- Stage least squares method. They
conclude that the GDP and FDI have positive relationship.
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(ShahulHameedu 2014) studied the Foreign Direct Investment in the scenario of India. He
provided the information of FDI in different sectors. He discussed the inflow of FDI to know
which had high share. He take the secondary data from different source. He also try to find out
the role and importance of FDI in India. He said that the inflow of FDI in different sector like
construction and development sector sustained high economic growth and development because
of the creation of job. Software & Hardware, computer and Drugs & Pharmaceuticals were
different sectors where there was high Foreign Direct Investors (FDI).
(Gaurav and Mohd. Amir 2011) studied the impact of FDI on GDP. They compared the India
and China. He takes the time period of 1993 to 2009. They applied the OLS (Ordinary Least
Square) method. They took GDP as the dependent variable and four independent variables. They
found the result that the increase in 1% of FDI would increase 0.07% in China’s GDP and
increase 0.02% in India’s GDP. They found that China growth is more affected than India
growth.
(Amna , Imran and Salman) studied the impact of foreign direct investment in Pakistan. They
took the time period of 1981-2010. They evaluate the growth performance of GDP and the FDI
and CPI of Pakistan. They used the multiple regression model to measure the link between GDP,
inflation and FDI. They considered GDP as dependent variable and FDI and CPI as independent
variable. They found that there is the positive relationship between GDP and FDI while there is
the negative relationship between GDP and CPI.
(Aviral, Tiwari and Mihai 2010), they were using panel data approach to study the relationship
of FDI and economic growth of Asian countries. They were took the time period 1986 to 2008.
They were found the FDI and exports enhance growth process. They also said that the labour and
capital plays a vital role in the growth in Asian countries. They were taken the data of 23 Asian
countries and they conclude that the exports and Foreign Direct Investment boost the economy
and capital and labour helped in this process.
(Dr.Nabila, Dr.Samia and Dr.Hafeez Ur Rehman 2011) analyzed between the GDP and FDI
from the period of 1983-2008. They took the data from World Development Indicator and from
World Bank of different countries such as Pakistan, India, Maldives, Srilanka, Bangladesh,
Japan, Nepal, Korea, China, Philippines, Thailand, Malaysia and Indonesia. They took the
variables GDP and FDI and they applied IPS Test (Im, Pesaran and Shin) and LLC Test. They
proved that GDP and FDI has positive impact on economic growth.
(Akbar and Akbar 2015) studied the inflow of FDI on Pakistan from the years of 2000-2013.
They took foreign direct investment, gross domestic product, terrorist attack, regime, political
instability, domestic capital formation, foreign debt, degree of openness and exchange rate as
avariables. They used multiple regressions as a model.
(Adil khan, ShandreMugan and Kaliappa) studied the relationship between FDI, exports and
GDP of different countries like Pakistan, India, Malaysia, Chile, Thailand and Mexico. They
collect data from World Bank, IMF, WDI, UNCTAD and International Financial Statistics from
the period 1970-2005. They used cointegration test and unit-root test to identify the result.
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(Adeel, Ali Bhatti, Taj) inquired in their study that FDI and Economic Growth of Pakistan have
relation: Pakistan economy is divided into three sectors primary sector, secondary sector,
territory sector. These sectors include different organizations. The data has been gathered from
state bank of Pakistan and economic survey for the years 1997 to 2013. The statistical tool used
in the study is vector error correction model (VECM) with panel co integration.The result of the
study suggests that the short run relationship between FDI and economic growth is favorable
while there is no co integration in the long run. Author used following variables in research
GDP, FDI, Domestic investment (DI), Human Capital, Institution and Infrastructure.
(Dr. Najia, Mariyam and Nabeel 2013). They discussed impact of FDI on economic growth of
Pakistan. The data has been taken from the year 1991-2010. The statistical test used in the study
is Augmented Dickey Fuller Test to check the long run impact of FDI on economic growth. Four
variables used Trade, inflation Domestic investmentand Debt. The study suggested that only
domestic investment is beneficial for country and while Debt, Trade and Inflation have negative
impact.
(S.M.Zahid, Jannatulferdous 2015) studied the Impact of macroeconomic on FDI in SAARC
countries. The data has been taken from the year 2002-2012. They took data from websites of
international monetary fund and World Bank. They took data of seven Asian countries. Srilanka,
India, Bhutan, Bangladesh, Pakistan, Nepal and Maldives. The method used in this study is
correlation and simple regression method. Variables used FDI, GDP, Inflation, Total Foreign
exchange reserves and Gross capital formation.
(Afzal 2015) analyses the impact of FDI on the growth in Bangladesh. He studied the
relationship between the FDI and the macroeconomics elements such as GDP, Inflation rate and
BOT. He took data from 1999-2013 and he applied the Multiple Regression Analyses and
according to his study there was a negative relationship between FDI and economic growth.
(Zeeshan, Mohsin and Usman) studied the FDI on the growth of Pakistan. His finding supports
the Bhagwati Hypothesis. He took five variables GDP, FDI, Labor force, capital formation,
education expenditure and import+ export. The data (1970 t0 2001) was collected from State
Bank and World Development.
(Maria and Ross 2002) analyses the relationship between the FDI and economic growth. They
used OLS regression from 1960 to 1995. The variables are FDI, Growth, CONDITIONING SET
and GDP.
(RAMZAN, March 2013) The main objective behind the study was to compare export to import
and development through FDI in Pakistan as well as GDP growth in Pakistan. For studied they
took data from 1976 to 2010 and applied Auto Regressive Distributed Lag (ARDL) Model. They
collected data from World Development Indicator and the variables were GDP (Dependent),
exports (Independent) and FDI (Independent). They concluded that there were no long run
relation between GDP, exports and FDI but there was a short run relation between GDP, exports
and FDI.
(Haddad, January 9, 2016) He studied the impact of FDI on the economic growth and
unemployment in Jordan. He took the time period of 1998 to 2014. He used OLS method. He
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INTERNATIONAL TRADE RESEARCH

took unemployment rate (UR) and economic growth (EG) as dependent variable and Foreign
Direct Investment (FDI) as independent variable. He concluded that the 1% increase in foreign
direct investment decreases (0.009%) unemployment rate and increase 1.219% in GDP in
Jordan.
(Muhammad Tahir, 2015) They studied the relation betweenFDI, foreign remittances, and
foreign imports to economic growth in Pakistan. They took the data from 1977 to 2013 and
applied ARDL model. He concluded that the FDI and foreign remittances have positive role in
economic growth while foreign import had negatively affect the economic growth of Pakistan.

METHODOLOGY:
The basic purpose is to evaluate the relation between FDI and GDP. The data used over 1999-
2015. We are using five variables in which GDP is taken as dependent and others like foreign
direct investment, labor force, Trade openness and exports are taken as independent variables.
LGDP= FDI+ labor Force+ Trade openness + Exports
VARIABLES DATA SOURCE
Dependent Variable:
Gross Domestic Product The World Bank
Independent Variables:
Foreign Direct Investment The World Bank
Labor Force The World Bank
Trade Openness The Global Economy
Exports The World Bank

DEFINITION AND EXPLANATION OF VARIABLES:

GROSS DOMESTIC PRODUCT:

GDP act as the monetary value of all goods and services produced in a nation for a specific
period of time. In Pakistan it is in Billion US dollar.
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INTERNATIONAL TRADE RESEARCH

D(D(GDP))
30

20

10

-10

-20

-30
2000 2002 2004 2006 2008 2010 2012 2014

FOREIGN DIRECT INVESTMENT:

It is an investment done by other country’s individual or a company in other country in order to
establish business operation or to buy business assets.
D(D(FDI))
3

-1

-2

-3
2000 2002 2004 2006 2008 2010 2012 2014
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INTERNATIONAL TRADE RESEARCH

LABOR FORCE:
Labor are those which put mental, physical and social effort to produce goods and services in an
economy. Labor force is the total number of people who are employed + unemployed in the
country.
D(D(L_F))
.0008

.0004

.0000

-.0004

-.0008

-.0012

-.0016

-.0020

-.0024

-.0028
2000 2002 2004 2006 2008 2010 2012 2014

TRADE OPENNESS:
Trade openness is the ratio of trade to GDP. In different papers it is used with a proxy. It can
calculate as:
Imports + Exports
GDP
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D(TO)
6

-2

-4

-6
2000 2002 2004 2006 2008 2010 2012 2014

EXPORTS:
The term exports can be defined as the sending of goods from one country to another.
D(X)
6

-2

-4
2000 2002 2004 2006 2008 2010 2012 2014
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RESULT OF OLS:

Variable Coefficient Std. Error t-Statistic Prob.

FDI 1.884184 2.262210 0.832895 0.4199

X 3.021950 1.090070 2.772253 0.0158
TO -6.121922 1.032427 -5.929645 0.0000
L_F 5238.406 984.8400 5.319043 0.0001

R-squared 0.973668 Mean dependent var 150.7151

Adjusted R-squared 0.967591 S.D. dependent var 68.74058
S.E. of regression 12.37501 Akaike info criterion 8.071560
Sum squared resid 1990.832 Schwarz criterion 8.267610
Log likelihood -64.60826 Hannan-Quinn criter. 8.091048
Durbin-Watson stat 1.674913

The result of OLS is shown in above table. The Gross Domestic Product is the dependent
variable and other like Foreign Direct Investment, Trade Openness, Labour force and Exports are
independent variables. The p-value in the table is 0.00 and it is smaller than 0.05, it shows the
model’s significance. Durbin Watson stat value for dependent variable is 1.67 and it comes in
between 1.5 to 2.5 so it means in the study the autocorrelation never exists.
The model is
GDP= 1.88 (FDI) + 3.02 (X) – 6.12 (TO) + 5238.4 (L_F)
The GDP in Pakistan is based on:
GDP= Consumption (C) + Investment (I) + Government Expenditure (G) + Net Exports (X-M)
Before defining the coefficient of variables, first we like to define the components of GDP

CONSUMPTION (C):
Consumption can be defined as the individual’s expenditure on different goods it may be durable
goods like (furniture, cars etc) or non-durable goods like (clothes, food etc) and on services like
(education, transportation).
INVESTMENT (I):
Investment can be defined as the purchase of goods and services by the business to maintain or
running the business.
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INTERNATIONAL TRADE RESEARCH

GOVERNMENT EXPENDITURE (G):

Government expenditure can be defined as the spending of government on different goods and
services. It may include the salaries and wages paid by government or purchase of goods.
NET EXPORTS (X-M):
Net exports can be defined as the difference between exports and imports.
The explanation of coefficient of our variable as FDI has positive impact on GDP, so if the FDI
is increasing so GDP is also increasing positively. After it the exports also have positive relation
with GDP, if the exports in the country increasing the GDP also increasing. The trade openness
has the negative relation with GDP and the last variable labour force has the positive relation
with GDP.

CONCLUSION:
As in this research paper we try to examine the relation between GDP and FDI. As FDI plays an
important role in the developing countries. In this paper we are using the time series data and
Pakistan is taking as case of study. The result shows FDI has positive impact on the economic
growth for the time period of 1999-2015. With the help of FDI country can improving their
infrastructures, also modify the political environment, also increase the trade, also increase the
new macroeconomic frameworks for increasing the foreign cash inflow and it also increase the
Pakistan’s economic growth.
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