Determinant of Foreign Direct Investment in Pakistan

Abstract

This paper analyzes the determinants of Foreign Direct Investment (FDI) in Pakistan. In this paper we want to analyze why Pakistan is unsuccessful in attracting FDI instead of its policy reforms. In this study we used secondary time series data sample from 1970-2010. We use variables GDP, Market size (GNP), Infrastructure, Terrorism, Exchange rate in order to measure the impact of these variables on FDI. We collect data on these variables from state bank of Pakistan and other secondary data sources. We use log log model to find out the determinants. We use ordinary least square method (OLS) in order to test the variable. At the end we find that all the variables have significant impact on FDI. We find that FDI is significantly and positively explained by GDP, Market size (GNP) and Exchange rate but Infrastructure and terrorism has negative impact on FDI.

We have conclude that when there is high level of GDP (GDP is increasing), high level of GNP (increase in GNP), and exchange rate is stable then the level of FDI increases. And when the terrorism in an economy rises then FDI of Pakistan starts to decline. We also use a variable named infrastructure but here we find that there exists a negative relation between FDI and infrastructure which may be wrong due to unavailability of data problem or may be some deviation in data became the cause of this result. We recommended that there is a need of not only good policies but also there is a need of implementation of these policies in order to increase FDI in Pakistan. Policy makers should provide conducive and friendly environment to investors to attract more and more FDI for Pakistan. Foreign investors should be given more incentives for the transfer of technology to host country. This would lubricate the local enterprises. In Pakistan import substitution policy related to FDI have played a great role in increasing FDI in Pakistan.