How Does Foreign Direct Investment Promote Economic Growth? Empirical Evidence from Pakistan

Abstract

Foreign direct investment (FDI) is assumed to be benefiting developing countries like Pakistan. Pakistan offers attractive investment opportunities for foreign companies and has adopted a number of policies to attract foreign direct investment into the country. The paper investigates the impact of foreign direct investment (FDI) on economic growth using time series data from period 1972-2011. The econometric framework of cointegration and error correction mechanism was used to capture two way linkages between variables of interest. An econometric result shows that FDI and economics growth has long run as well as short relationship with each other and also the impact of export and foreign remittances on economics growth rate is found to be positive. Based upon these results the ultimate objective of the Pakistan government is to attract FDI for development an appropriate policy mix is necessary to be taken in the future.