An Estimation of Relationship between Foreign Direct Investment and Industrial Structure Upgrading in Pakistan: Decomposition Analysis

Abstract

FDI plays an important role in the industrial structure transformation in Pakistan over the years. However, due to the turbulent international financial markets, political instability, frequent strike processions, deteriorating law and order situation, energy crisis and so on, have resulted in FDI fluctuations which seriously impacts the normal operation of the national economy in general and have severe implications for industrial structure improvement in particular. As a result, FDI in Pakistan declined sharply. Many foreign enterprises withdraw their business from Pakistan. There is an urgent need for industrial structure upgrading in Pakistan so as to regain the considerable market potential and attract more FDI in the country. This paper uses co integration analysis and dynamic variance decomposition, to present the relationship between FDI and Pakistan’s industrial structure upgrading. The result shows that there is a stable relationship between FDI and industrial structure upgrading especially in the long-term. Moreover to successfully achieve the task of dual transformation of stabilizing economy for attracting more FDI and upgrading industrial structure government have to follow a viable policy option culminating the hindrances in the process of sustainable development.

Keywords: Foreign Direct Investment, Industrial Structure, Political Stability, Decomposition analysis