DETERMINANTS OF FOREIGN DIRECT INVESTNMENT & ITS IMPACT ON ECONOMY OF PAKISTAN By FARMAN ALI Roll. No.

454 Thesis submitted in partial fulfillment of The requirements for the degree of BS (BANKING & FINANCE)

DEPARTMENT OF BANKING AND FINANCE GC UNIVERSITY, FAISALABAD.

JUNE 2011

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Dedication

Dedicated to my worthy

Father

and

Mother.A

pioneer for my

better future whose mature, valuable guidance, enable me to perceive and pursue higher ideas in life. Last but not least I want to thanks

my cousin Sarfraz Alam (MTO NBP) whose guidance is always with me and without his financial support I cannot able to complete my degree.

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Certificate by the Research Supervisor

I certify that the contents and form of thesis submitted by Mr. Farman Ali, Roll No: 454, Reg No: 2007-GCUF-2740-614 has been found satisfactory and according to the prescribed format. I recommend it be processed for evaluation by the External Examiner for the award of degree.

Signature..

Name.

Stamp Chairperson Dean,

Faculty of Science and Technology, GC University, Faisalabad.

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Acknowledgement:

With pen in hand, I pause to think what do justice to express my gratitude to Almighty Allah for his unlimited graciousness because words are scare, knowledge is limited and time is short to express his majesty. I have the purls of my eyes to admire the blessings of the compassionate, omnipotent, the omnipresent, the merciful and the beneficent Allah who is the entire source of all knowledge and wisdom. Due to His bounteous bless, I became able to contribute this research report to wards the deep ocean of knowledge already existing. I deem it great honors to offer my heartiest gratitude to my venerable supervisor SIR SAIF, for his cooperation, valuable suggestions, inspiring guidance, affectionate supervision and consistent encouragement through out this period. I also wants to thanks to my vulnerable teacher sir Imran (Lecturer Economics depatmetnt) for his guidance and help. I cannot ask for more from my mother, Firdous Bano, as she is simply perfect. I have no suitable words that can fully describe her everlasting love to me. , I remembered her continuous support when I encountered difficulties.

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Mother, I Love you. I feel proud of my Brothers & sisters; they have always been my best counselors. Finally, I acknowledged my gratitude to all my friends, my roomates for being the surrogate family during four years, I stayed here in Faisalabad. I am really thankful to them for their kind Moral support. Allah the Almighty bless my parents and my well wishes with good health and prosperous long lives and be source of prayers for me.

` 8TH

FARMAN ALI BBA (B&F)

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Table of Contents
Table of Contents....................................................................................6 Chapter 01...............................................................................................8 1.INTRODUCTION............................................................8 1.2 OBJECTIVE OF THE STUDY:........................................................................14 1.3 HYPOTHESIS............................................................................................16 1.4 SIGNIFICANCE OF STUDY............................................................................17 Chapter 02.............................................................................................19 2. Literature Review..............................................................................19 Chapter 03.............................................................................................25 3. Methodology......................................................................................25 3.1. IDENTIFICATION OF VARIABLES....................................................................25 3.1.5 THEORETICALL FRAMEWORK DIAGRAM...................................31 3.3 MODEL..................................................................................................32 CHAPTER 04.................................................................34 4.RESULTS
AND

DISCUSIONS.....................................................34

CHAPTER 05.....................................................................42 CONCLUSION .....................................................................42 REFERENCES......................................................................44

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List of Abbreviations FDI GOP BOI GDP SSA LC FOREX TO SBP

Foreign Direct Investment Government of Pakistan Board of Investment Gross Domestic Product Sub Saharan African Countries Cost of Labor Exchange Rate Trade openness State Bank of Pakistan

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CHAPTER 01 1.INTRODUCTION 1.1 Foreign Direct Investment

Foreign direct investment (FDI) is defined as "investment made to attain lasting interest in enterprises working outside of the economy of the investor. United Nations defines FDI as the control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its corresponding for an unincorporated firm. "The FDI relationship comprises of a parent enterprise and a foreign associate which together form a universal corporation (Transnational Corporations). In order to meet the criteria as FDI the investment must afford the parent enterprise control over its foreign affiliate. A foreign direct investor may be classified in any sector of the economy and could be done by of an individual, a group of related individuals, an incorporated or entity, a public company or company, a group of related enterprises, a government body, and any estate (law), trust or other societal organization or any combination of the above. FDI is playing a key role in the international busienes.It provides a new markets, access to new technology, enhancement of skills, and cheaper

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production facilities to the firms. In this period of globalization, FDI inflows are increasing at a greater rate then ever. It is been founded that the rate of growth of world FDI is ten times greater than the growth rate of GDP over the period of 1960 to 1990(yang et al 2000).Due to this globalization factor FDI also posses its own increasing importance and it is now becoming a prime concern for a policy makers to make effective foreign direct investment policies.FDI has its many facets, but exacting aspect that policy makers in capital starved countries are disturbed with the basic and key determinants of FDI inflows. Today the ongoing process of amalgamation of whole world economy and liberalization in many developing countries had led to a severe competition of flow of FDI. Mostly the countries of Asia are in great competition with each other to better attract foreign direct investment to its country, Most of countries are providing its level best to improve fundamentals of economy and infrastructure of country by attracting more foreign direct investment .Most of developing countries used to change many of its policies and relax many measures like taxation matters, attitude, and by Better control over macroeconomic variables Pakistan is also considered as a developing country and its in race with other Asian countries to attract some handsome inflow of FDI to country. As Pakistan has its own important geographical location ,it is considered as

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a gateway of Asia and it possesses the remarkable attractive conditions for foreign direct investment especially in the sectors like Telecommunication, Agriculture, Power and services sectors. Apart from these sectors Pakistan commodity sector has more attraction for better inflow of FDI because government of Pakistan is offering 100% equity investment in commodity sector. Table 1. FDI inflows into Pakistan Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 FDI (Millions) 469.9 322.5 484.7 798.0 949.4 1524.0 3521.0 5139.6 512.8 Annual Growth FDI AS % of Rate GDP - 0.51 0.55 - 31.37 50.29 64.64 18.97 60.52 131.04 45.97 0.26 0.82 1.17 0.98 0.99 1.38 2.77 3.57 3.20

Source Board of investment By making overview over some past years like in 1980s government of Pakistan has taken market economic reform policies and after that government has used to gradually liberalize its policies of trade and investment by providing many monetary and fiscal incentives to foreign investors like concession in taxation policies, tariff reduction , welcoming attitude Khan(1999).Then gradually government of Pakistan used to make

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further liberalization in 1990s and give birth to many other sectors like Telecommunication, Agriculture, and insurance to FDI. But unfortunately because of immediate political changes and inconsistency in policies of government leads to decline in the FDI and it is considered to be quite low as compared to other developing Asian countries like China and Malaysia. By viewing the overall statistics of FDI inflow in Pakistan it is $5409.8 Million during the period of FY 2007 to 2008 which is considered as 5.27% higher than FY 2006 to 2007 and 53.65% more than FY 2005 to 2006 the overall inflow from 1999 to 2010 are as mentioned in table 1.Recently government of Pakistan has relaxed its policies regarding investment and opened almost all the sectors of economy to attract handsome FDI in Pakistan.GOP is offering tax relaxations and may other investment incentives to foreign investors which enables them to achieve 100% possession for investment in many sectors of country .Meanwhile in this new policy of investment government of Pakistan has provided the equal opportunities of investment for both domestic and international investors. In current scenario no any country wishes to make investment in Pakistan because of the conditions which are going worst and worst day by day So my this study is basically based on tracing the key determinants of FDI and how it influences the overall economy of Pakistan .

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The body of literature recommends that FDI is directly links with economic environment of host country. Most of studies suggest that the factors which influence FDI are mostly of cost related, macro economic factors and the overall the development strategy of a host country. Some of studies suggest that economic conditions or fundamental policies of the recipient countries are considered as a determinant of flow of FDI.. This literature is in line with Dunnings eclectic paradigm (1993), which suggests that it is the locational advantages of the host countries e.g., market size and income levels, skills, infrastructure and political and macroeconomic stability that determines cross country pattern of FDI. Following this approach Nishat and Anjum (1998), have estimated that political stability, peaceful law and order situation, level of technical labor force and mineral resources and liberal policies of the government attracted foreign investors in Pakistan. However, it has been argued that the location specific advantages required by foreign investors are changing in the globalised more open economies of today. Accordingly, in his path breaking work Dunning (2002) finds out that FDI from more advanced industrialized countries depends on government policies, transparent governance and supportive infrastructure of the host country. However, very few studies exist that have empirically estimated the impact of selective government policies aimed at FDI

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The present study which I am going to carry out is aiming at identifying the basic and significant determinants of FDI in Pakistan which influences foreign investors decision to make investment in Pakistan over the period of 1999 to 2009. By reviewing literature the most of determinants of FDI in different countries are same but the results are quite different because of different techniques used by different researchers My study is basically comprises of two dependent variables namely Foreign Direct Investment and Economic growth while independent variables are trade openness. , Gross domestic Product, Exchange Rate , Labor Cost, and Trade openess,.One of the key advantage of this study is that it also provides information about how FDI influences economic growth of country and the interaction among them. During the study I am going to use regression analysis to find out relationship between each variable of study.

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1.2 Objective of the Study:

There is a substantial body of literature is available that analyzed the effect of determinants of FDI .These determinants are approximately same in every country but the results of every researcher is different. My present study is not only based on analyzing the determinants of FDI only, it also investigates its role and effect on economic growth of Pakistan. This study is also helps policy makers to attract handsome FDI into country by controlling the factors which discourages FDI. The earlier literature in this connection is essential but hardly substantive or realistic to understand the determinants of FDI and recent rise in FDI, no study has been conducted to study the factors responsible for recent changes in FDI, the earlier studies are either superficial or theoretical and mainly focusing the socio-political and economic constraints for low level of FDI and its reasons. No quantification model or simple OLS regression has been applied to generate the nature of relationship among the set of variables. A lot has been changed since, the accelerated economic reforms or recent stability specially after 9/11, or nuclear tests of 1998 and resultant economic

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sanctions and the nature and working of the key macro economic variables etc, Other than this the interrelationship of different factors, forecasting and the causality direction with respect to social and political risk index measurement still missing in earlier studies, which requires the further investigation. Consequently, this study is designed to understand the number of factors determining the recent changes in foreign investment in the country. Objectives in short are: To investigate the key Determinants of FDI in Pakistan. To access the affect of FDI on economic growth To study the changes of FDI in Pakistan

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1.3 Hypothesis
Hypothesis 1: H1: Labor cost has negative impact on foreign direct investment. Hypothesis 2: H2: The higher value of host currency, higher the level of FDI inflows in host country. Hypothesis 3: H3: Better gross domestic product, higher the rate of FDI into country. Hypothesis 4: H4: Trade openes has positive relationship with FDI Hypothesis 5: H5: Higher the foreign direct investment, higher the Economic growth.

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1.4 Significance of Study

This study is conducted to analyze important dimensions of foreign direct investment in Pakistan in light of different studies conducted by a variety of different researchers from all over the world .This study also investigates the impact of FDI on the economic growth of country. Pakistan being developing country has not being a large recipient of FDI .Since government of Pakistan is making many facilitating steps to attract FDI inflows in Pakistan. The one and only basic reason behind attracting FDI is to stabilize itself economically and overcome the increasing rate of unemployment but from couple of years the rate of FDI is continuously decreasing because of variety of reason like infrastructure, country condition, and politically instability .So this study also has its own importance because study itself identifies the key determinants of FDI .Apart from the above mention benefits this study also beneficial for a foreign investor who wants to make investment in Pakistan because it provides him all the necessary information regarding determinants of FDI and what is the basic reason behind the continuous downfall in FDI in Pakistan.

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To highlight the importance of macro-economic factors and their role in foreign investment, so that it provide benefit to government and public by increasing employment this leads to economic development. Last but not least this study helps in studying government policies on FDI and to aware the policy makers from the importance of FDI, so that they can make policies accordingly which provide benefit to our country and attract foreign direct investment.

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CHAPTER 02 2. LITERATURE REVIEW

There is substantial body of literature is available on Determinants of Foreign direct investment some the important contributions of different researchers are as under Usha et al (1999 -Revised 2000), used a mixed fixed and random (MFR) panel data estimation method to allow for cross-country heterogeneity in the fundamental relationship between FDI and growth, found that the relationship between investments, both foreign and domestic, and economic growth in developing countries is highly heterogeneous and that estimation methods, which assume homogeneity across countries, can yield misleading results. The results suggest that there is some evidence that the efficacy of FDI in raising future growth rates, although heterogeneous across countries, is higher in more open economies. (Asiedu, 2002) discuses the determinants of FDI to developing countries. This papers aims at whether the factors which influences the FDI in developing countries would affect the sub Saharan countries differently, simply means if Africa is different. The factors like Real GDP

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infrastructure, Labor cost, Openness, Taxes and Tariff, Political stability are used as independent variables while that of FDI is considered as dependent variable of the study. The results of study indicate that increase in investment and development in infrastructure produces a positive impact on inflows of FDI in none SSA countries while but fails to produce a positive impact on countries of SSA.The other factors like openness promotes FDI inflows to SSA countries and also for non SSA countries. This paper suggests that African government should develop a method to increase reliability of the reform policies. Second thing is that those policies which are very much successful in other countries should not be implemented directly to the Africa or replication of these policies in Africa is not beneficial because these policies lead to different impact.

(Shah & Masood, 2003) conducted an empirical investigation regarding the Determinants of FDI in Pakistan perspective.FDI inflows in Pakistan are considered as a dependent variable during the study while the variables like Cost factors, political factors, social factors, Cost of capital and market size are considered as a independent variables. During the study they used regression and cointergration techniques to find impact of independent on dependent variable. They concluded that there is no exception for Pakistan to keep itself apart of this internationalization process. Instead the size,

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resources and perceptions are advocating for fruitful and fast growing investment opportunities. Resource gap, can only be achieved by reducing public burden and by the encouragement of private business activities in the country. FDI is a potential source of filling this multidimensional gap. (Bevan & Estrinb, 2004) carried out research on Determinants of FDI in case of European transitional economies. This objective of the study aims at determining the key determinants of FDI from western countries, primarily in the European transitional economies. The factors like labor cost, gravity factors, market size, Trade factors GDP are used as independent variables for the study. After this study they found that factors like market size, unit labor cost and some gravity factors are considered as key determinants of FDI while the country risk of host is not a significant determinant. They also founded that there is a positive relationship between host country and source country GDP, while it is inversely related to the distance among countries and unit cost of labor. This paper suggests that integration with European Union is very much important for FDI in transitional economies.

(Moosa & Cardak, 2005) they examined the some of eight determinants of FDI through extreme bond analysis to a cross sectional sample which composed of some 138 countries over the period of 1998 to 2000. During their study they used GDP, Growth rate of GDP, Exports as percentage of

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GDP, Commercial energy used per capital, Country risk and Tertiary Education and students while FDI as percentage of GDP is considered as dependent Variable of study. Results of study clearly stated that three variables namely export as percentage of GDP, Risk of country, and Telephone lines per 1000 of population are considered as robust variables which highly influences dependent variable. At the end they concluded that countries which are economically developed are successful to attract FDI inflows to its country. They also explored that consumption of energy, rate of growth, and real GDP insignificantly increases the inflows of FDI.

(Ali & Guo1, 2005) this study empirically focuses on the determinants of FDI in china, This study is based on the analyses of responses from 22 basic operating firms in china by sharing views about what are the basic motivations for firms to accept FDI.Cost of capital, geographical distances, cost of labor, polices of government, and cultural differences are considered as the basic factors which attract FDI in china. During their study they found that there is huge potential market size exists in china and one of the key finding is that global integration is one of the key factor for those firms which are going to invest in china. Further they concluded that foreign firms dont come to china by aiming of taking advantage of any one single factor

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(Ang, 2007) examines the basic determinants of FDI in Malaysia over the period of 1960 to 2005.During his study he used GDP, Growth Rate, Infrastructure, Trade openness, Exchange rate, Tax rate, as independent variables while FDI is dependent variable. By utilization of annual time series data he concluded that increase in level of level of infrastructure, Openness in trade related policies, Financial Development, leads to development in FDI inflows. While policies like increase in taxation, appreciation in rate of exchange, Closeness in policies of trade ultimately leads to decrease in level of FDI or normally discourages FDI inflows.Meanwhlie he suggests that strong economic growth is very much necessary and need to b focused for the better attraction and encouragement of FDI into Malaysia. (Nawaz, 2010) Work mutually to investigate the determinants of FDI in Pakistan. During their study they used OLS model and analyses some of variables like GDP and its growth rate, exports price index, imports, and volume of exports. The results of paper suggest that by utilization of regression it is confirmed that their exists a positive relationship between increase in GDP and FDI and one of important finding is that export demand that is shown by bulk of exports is a key determinant of FDI in Pakistan. They concluded that there is need of change in policy of investment in Pakistan to attract FDI at greater extent and it should focus on

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export oriented industries instead of encouraging FDI for domestic consumption. (Awan, Khan1, & Zaman, 2011) studied a nexus between foreign direct investment and Pakistan economy by using co integration and Error correction Approach during the period of 1971-2008 .This paper comprises of FDI as a dependent variable while trade openness, current account balance , Gross fixed capital formation, Inflation rate , GDP at factor cost as independent variable. From the results of model used it shows that there is a positive association between FDI and the independent variables. This study concluded that by focusing on these determinants Pakistan can enhance its economic situation and growth as well and they recommend that government of Pakistan should always open its door policy to attract enough FDI inflow into Pakistan

(Cuyvers, Soeng, Plasmans, & DenBulcke, 2011) conducted research on determinants of FDI in Cambodia. The basic aim of this paper is to analyze the key determinants of factors which might influences the FDI inflows in Cambodia during the period of 1995 - 2005.One of the essential element of this study is that it includes geographical and economical, and political characteristics of Cambodia This research paper is comprises of dependent

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variable as FDI while market size, Labor cost, Borrowing costs, Exchange Rates, Country Risk and Geographical Distance. During the study panel data sets were used for both approved and realized FDI.Results of the study suggest that the determinants of both realized FDI and approved FDI are very much similar to each other. The variable like country GDP, Rate of exchange and Trade with different host countries have produce positive impact on FDI inflows while the factors like geography of Cambodia negatively affects the inflows of FDI.

CHAPTER 03 3. METHODOLOGY 3.1. Identification of Variables

This study is going to be conducted on two dependent variables and some of four independent variables

3.1.1 Dependent Variables

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Dependent variables which I am going to study are as under

3.1.2 Foreign Direct Investment

Foreign direct investment (FDI) is defined as "investment made to attain lasting interest in enterprises working outside of the economy of the investor."The FDI relationship comprises of a parent enterprise and a foreign associate which together form a universal corporation (TNC). In order to meet the criteria as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its corresponding for an unincorporated firm. A foreign direct investor may be classified in any sector of the economy and could be any one of the following

An individual A group of related individuals An incorporated or unincorporated entity A public company or private company A group of related enterprises A government body

An estate (law), trust or other societal organization or any combination of the above.

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The total inflows of FDI from the period of 1999 to 2009 are shown in table 1.The data is taken mostly from websites of Statistical Bureau and State bank of Pakistan board of investment ,

3.1.3 Economic Growth

Most Of economist agree that inflows of FDI results in increase in economic gtowth of economy(Blonigen,2005).The major characteristic of FDI in economic growh are advancement in technology ,and globilazation factor.In other words enhancement in inflows of FDI leads to help to narrow the gap between domestic saving ratio and level of investment.From literature the relationship between growth and FDI provides a mix form of empericical evidences like ,De Mello (1999) founded that whether FDI contributes to the growth of eciniomy depends upon the characteristics of recipient country.However Johnson (2006) founded that inflows of FDI boosted economic growth in countries which are on track of development. My present study seeks to contribute to the empricial literature on relationship between economic growth and Foreign Direct Investment.In this study I am taking Gross Domestic product form 1999 2009 and relationship between Foreign direct investment and economic growth is shown thourgh covariance .

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3.1.4 Independent Variables

Those variables which serve as independent variables of study are as under.

(a).Exchange Rate (FOREX)

Foreign exchange is used evaluate the position of foreign exchange reserves in order to determine the stability in exchange market and the overall macroeconomic policies of GOP. Thus appreciation in the value of home currency leads to positive results on FDI while there are also some evidences which reveals the negative relationship between FOREX and FDI inflows (Dewente, 1995 and Kiyota and Urata,2004) .Forex plays a key role in stability of economy of any country.Apreciation in value of home currency leads to increase in the FDI and it becomes very much cheaper to hire labor at low rate. The massive FDI inflows and remittances from workers have significantly cherished the real equilibrium exchange rate of Pakistan. (Hafeez ur rehman and Atif Ali).In this study I am going to take yearly rates by taking average of all twelve months of one year and so on respectively. The basic data I will take in Pak rupees and collected from various sources like State bank etc

(b).Labor Cost (LC)

Low cost of labor is the essential element in attracting FDI inflows into country (Jun and Sing, 1996).There exist positive relationship between FDI

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and labor cost but some empirical studies like (Bevan and Estris, 2004, Wei and Liu, 2004) suggests the negative relationship. However Meyer (1995) concluded that multinational organizations in Eastern and Central Europe are not necessarily motivated by low labor cost. In this study I go with the negative relationship of Labor cost with FDI and I am taking wages rate from 1999 2009 which is being fixed in annual budget of Pakistan .I take this data from budgets of respective years.

(c).Trade openness (TO)

Trade openness is the ratio of imports and export to GDP; this usually measures the openness of economy. The impact of openness on FDI is totally dependent on the investment type. Many researches concluded with the positive relationship of FDI to trade openness like Chakraborti (2001), Asiedu and Fedderke (2006).In this study I also make a hypothesis of a

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positive relationship between FDI and trade openness. Here I am going to take imports as percentage of GDP.

(d). Gross Domestic Product (GDP)

Gross domestic Product is defined as the sum of market prices of all the goods and services produced in Pakistan. Some of the studies like (Muhmmad Zahid Awan ,Bakhtiar Khan, 2010) founded that GDP is 5 % significant which shows that high growth in different sectors will leads to maximum attraction of foreign direct investment in Pakistan. Here in this study I also make a positive relationship of GDP to FDI and the I will get data from sources like State bank of Pakistan and federal bureau of statistics.

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3.1.5 Theoreticall Framework Diagram

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3.2 Data used in Study

The study is based on time series data over the period of 1999 to 2009 which is obtained from various sources like Board investment ,Federal Bureau of statistics, State bank of Pakistan, budget of various years, and economic survey of Pakistan. List of Explanatory Variables S.NO Variable 01 GDP Definition Real Gdp Reason for Including Captures demand for goods and services and Provides a representation of the marketsize hypothesis Indicates the degree of international exposure .A measure of openness of the economy It captures the capabilities and skills of domestic labor It is core factor while considering investment by foreign investors

02

To

03 04

Lc Forex

Value of imports of counrty Wages rates Average of montly rates in year

3.3 Model

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Here I have examined different case studies .which was conducted by many well-known researchers like moosa and carsdak. My study is basically based on the impact of some four necessary independent variables like Trade openness, Exchange Rate, Gross domestic Product, and labor cost on foreign direct investment. I am going to apply statistical tools like regression analysis to find relationship among determinants and FDI the relationship between FDI and economic growth is being calculated by correlation while the model is taken as suggested by Muhammad and Bakkthiar khan (2011). But the variables of the study are somehow bit different. So the relationship is as under FDI=

Where
FDI = Foreign Direct Investment LC = Labor Cost FOREX = Exchange Rate TO = Trade openness GDP = Gross Domestic Product t = Error term

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Table 3.1 Variables and their expected Sign S.no 01 02 03 04 Variables Exchange Rate Trade Openess Labour Cost Gross Domestic Product Expected Sign >1 >1 <1 >1

The above table shows that the variable which is less than has negative relationship with Foreign direct investment while those variables which are greater then one is significant and have positive relationhip with Foreign direct investment.

CHAPTER 04 4.Results and Discusions

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Descriptive statistics on the dependent and independent variables of my study is presented in table 4.1.1. This table explains the summary statistics for the variables used in the model. The table shows the results about determinants of FDI In Pakistan for the period of 1999-2009.
Table 4.1.1 Descriptive Statistics (Determinants of FDI)

Mean FDI FOREX Trade Openess Labour Cost Gross Domestic Product 1767.509 62.943775 .004196 3645.45 4569508.09

Std. Deviation 1961.6557 9.4824768 .0016707 1404.538 794619.737

N 11 11 11 11 11

The standard deviationof various variables presents the extent to which variables may deviate from their average value. The mean value of Forex is 6.2% that shows 62% foreign exchange rate is reported during this study period. Standard deviation is 9.482 It shows that the value of forex can deviate from average(mean) to both sides by 948.2%. The mean value of Trade openness is 0.004196 while its standard deviation is 0.0016707 which shows that value of trade openness can deviate from mean by 1.67%. The mean value of Labor cost is 3645.45 while its standard deviation is 1404.538 this means that labour cost may deviate from mean by

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1371.462.There exists a greater chance of deviation of labour cost from its mean value. Gross domestic product posses a mean value of 4569508.09 while its standard deviation is 794619.737 which means that GDP can deviate from its mean by 794619.737.As standard deviation is less from mean which depicts that there is less chance of deviation of GDP from its mean value.

Table 4.1.2 Regression Results on Determinants of FDI

Coefficient Intercept Forex Trade Openess 11915.777 -225.719 2001697.065

T Statistics 2.516 -3.340* 4.158**

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Labour Cost GDP

.832 -.002

1.074 -1.512* .946 .824

R Square Adjusted R Square *Significant at 90% **Significant at 95%

Table 4.1.2 presents regression results obtained by using statistical tools . The table shows estimated coefficients and their t statistics. The value of R square is 0.949 that show that 0.949 variation in the FDI. T value for Forex is -3.340, which shows that the relationship between exchange rate and foreign direct investment is insignificant .The coefficients value is found to be -225.719. It shows that with one unit change in value of FOREX ,FDI changes by -225.719. These results are also same as Scott- Green (1999) who shows that appreciation in the value of home currency leads to increase in the inflows of FDI at a greater extent because it become easy to hire more and more skilled labour and other resources at cheaper rate in recipient country .There exists a several reasons in how increase in value of home currency can increases FDI ,Firstly depreciation in value of dollar can increases the confidence of home investors ,secondly the depreciation in value of dollar

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makes assets much cheaper in Pakistan which becomes a easy for foreign investors to buy Pakistani assets and thirdly a depreciation of US dollar will make goods produced in pakistan relatively cheapere as compared to goods produced in home country .Thus results shows a positivee relationship between foreign direct investment and exchange rate.This means that if the currency value of home country is goes on increases day by day then its leads to enhancement in confidence of foreign investors to invest in Pakistan. T value for trade openness is 4.158 which shows that the relationship between FDI and trade openness ins significant at 95% and if there is one unit increase in trade opness would generate about a 2001697.065 increase in foreign Direct Investment. The findings of study are in line with that of Fedderke (2006) and Chakraborti and Romm(2006) who also shows a positive relationship between trade openness and foreign direct investment.Hence ,the results suggests that increase in liberalization of trade setor may be codusive to inflows of FDI at larger extent.

T value fo GDP is -1.512* this shows that GDP is significant at 90 % and its value of coeeficient is -.002.This means that with one unit increase in

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value of GDP then FDI changes to -.002. This shows a positive relationship between FDI and GDP .Investors in any country are attracted due to higher GDP growth rate of its economy.This evidence suggests that economic growth is very much necessary for Pakistan to attract FDI inflows .These results are very much similar with general finding of literature like Wang and Swain (1995) , Choi and Bollington(1999) which have consistently found a positive role of GDP growth rate in attracting FDI and fouded that GDP growth is very much necessary for foreign direct investment.In Pakistan perspective these results are in line with study of Muhammad Zahid, Bakhtiar Khan (2010) who shows that foreign investors will encourage in making investment in Commodity- Producing sector of Pakistan due to high GDP rate.Hence results implies that GDP growth is very much necessary to bring inflows of foreign direct investment into Pakistan .

T value for Labor cost is 1.074 which shows that the relationship between FDI and trade openness ins significant at 90%. The coefficients value of labor cost is found to be 0.832 which means that one unit increase in labor cost will leads to 0.832 change in value of foreign direct investment.The result of study are also same with (Jun & Singh, 1996) who shows that lower labour costs make countries with abundant skilled and/or unskilled

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workers more competitive and attractive, andare likely to encourage FDI inflows .Hence from results it is concluded that skilled labor is very much beneficial for attracting Foreign direct investment

The whole summary of model is shown as under in the table 4.1.3

Table 4.1.3 Model Summary

Adjusted R Model 1 R .946a R Square .894 Square .824 Std. Error of the Estimate 824.0872

a. Predictors: (Constant), LC, Forex, GDP, TO

In the above table value of R square is 0.949 which means that there is 94.9 % variation in Foreign direct investment is explained by independent variables.

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Table 4.1.4 Coefficient Correlationsa

Model 1 Correlations GDP Forex TO LC Covariances GDP Forex TO LC a. Dependent Variable: fdi GDP 1.000 .405 -.545 -.557 1.140E-6 .029 -279.929 .000 Forex .405 1.000 -.116 -.737 .029 4566.715 -3760834.136 -38.583 TO -.545 -.116 1.000 -.231 -279.929 -3760834.136 2.318E11 -86139.516 LC -.557 -.737 -.231 1.000 .000 -38.583 -86139.516 .600

correlation is used in this study for data to find out the degree of association between variables. From above table it is concluded that Gross domestic product is it is negatively correlated with trade openness and labour cost which means that increase in value of GDP leads to decrease in values of skilled labour and the it is easy to get labour while the values of trade openness also get decrease in such a way that our imports becomes less and exports greater.GDP shows positive correlation with exchange rate which depicts that increase in GDP leads to betterment in value of exchange rate.. Forex shows negative correlation with variables like Labour cost and trade openness which means that increase in the value of exchange rate then value

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of trade openness and labour cost get decreases.The value of imports of country goes up and labour becomes expensive within a country . Labor cost in negatively correlated with other variables like GDP, forex and trade Openness while it is positively correlated with itself which means that with the increase in the value of labor cost leads to decrease in value of foreign exchange ,Gross domestic product and trade openness Trade openness shows negative correlation with all variables which means that increase in value of imports of country produces negative impact on gross domestic product , labor cost and exchange rate .

Chapter 05 Conclusion

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Foreign direct investment is considerd to a most important element of Globilization .Over the last few years there is a sharp growth in FDI inflows into developing countries and developed countries.FDI is playing key role in economic development of developing countries including

Pakistan.Pakistan is one of the most ideal location for foreign investment .There is lot of oppurtunities for foreign investors in sectors like power and energy ,telecomuincation and fertilizers sector. The basic purpose of this study is to examined the determinants of foreign direct investment into Pakistan over the period of 1999 2009.To examined the impact of variables regreesion technique is being used .From results of study it is explored that some of the independent variables are insignificant while some of variables are significant toward foreign direct investment. The variable like gross domestic product ,labor cost and trade openesss are significant and possess a positive relationship with foreign direct investment .This means that for better foreign direct investment there is need of openness in trade ,skiled labor and strong GDP.while the variable like forex shows insignificance with FDI. Apart from the above variable there is need of analyzing the current condition of Pakistan .Nowadays Pakistan is in cage of too much energy shortages, terrorism and other security problems and in these circumstances

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no any contry or individual investor wishes to make investment in Pakistan. Now this is a major responsibility of government of Pakistan and policy makers to think about these core issues and make some advance measures to regain the confidence of foreign investors because foreign investment contributes positively to our economy.

References

Ali, S., & Guo1, W. (2005). Determinants of Foreign Direct Investment in chinna. Journal of Global Business and Technology, Volume 1, , 30-33. Ang, J. .. (2007). Determinants of foreign direct in malaysia. Journal of Policy Modeling volume 30 , 185189.

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Asiedu, E. (2002). Determinants of foreign direct investment to developing countries. Elesever science , 118-119. Awan, M. ,., Khan1, B., & Zaman, K. u. (2011). Economic determinants of foreign direct investment in comodity sector of pakistan. African Journal of Business Management Vol. 5(2), , 537-545,. Bevan, A. A., & Estrinb, ,. S. (2004). The determinants of foreign direct investment intro transitional economies. Journal of Comparative Economics , 32 775787. Cuyvers, L., Soeng, R., Plasmans, J., & DenBulcke, D. l. (2011). Determinants of foreign direct investment i n Cambodi. Journal ofAsianEconomics , 12-14. Moosa, ,. I., & Cardak, B. A. (2005). The determinants of foreign direct investment:an extreme bond analysis. J. of Multi. Fin. Manag. 16 , 199 211. Nawaz, R. a. (2010). determinants of FDI in pakistan. journal of economics , 35. Shah, Z., & Masood, Q. (2003). Determinnts of foreign direct investment in pakistan.An emprical Investigation. The Pakistan Development Review , 42: 4 Part II (Winter 2003) pp. 697714.

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Akhtar, Muhammad Hanif (2000) The Determinants of FDI in Pakistan: An Econometric Analysis: The Lahore Journal of Economics 5:1. Dunning, John H. (1973) The Determinants of International Prediction. Oxford Economic Papers 25:3. World Bank (Various Issues) World Development Indicators. Washington, D. C.

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