The Determinants of Capital Inflow in Developing Countries with Special Reference to Pakistan

Abstract

Introduction: The capital mobility has increased in the developing countries after opening up of markets and WTO since 2001. Now the investors all over the world are free to move their capital and invest it in the country of their choice. Now the countries having big markets and number of customers are the target of big investors. This is the reason that capital has been flowing in the developing countries.

Objectives of the study: The main objective is to investigate into the determinants of rising capital inflow into developing countries in general and Pakistan in particular and its impact on its economy.

Main Research problem: Our main research problem is to study the determinant of capital inflow in Pakistan and the policies of the Government to attract foreign direct investment. Another problem is to study whether the policies are conducive for foreign investment.

Methodology: In this study, we have taken the sample of eight developing countries of Asia such as Bangladesh, China, India, Malaysia, Indonesia Pakistan, South Korea and Thailand. The annual data of these countries is taken from International Financial Statistics and World Bank database for 23 years from 1990 to 2012. The E=views7 software has been used to analyze the data.

Findings and Results: Our results specifically show that foreign exchange reserves, fiscal incentives, current account position, efficient capital market, strong infrastructure and efficient legal, judicial system and law and order situation play key role in attracting foreign capital inflow. At the moment Pakistan has been facing problem of twin deficits, political instability due to terrorism, and inefficient legal system, which are hampering large inflow of capital. Even then, Pakistan has been receiving more $12 billion remittance every years and ample foreign direct investment in telecommunication, banking and information technology sector. Our study show if government focus on political stability it can attract more capital flow. Our results are robust and consistent with other studies so far made on this subject.

Key words: capital inflow, competitive edge, exchange rate, foreign exchange accumulation.