Determinants of Foreign Direct Investment in Pakistan

Abstract

The objectives of the study were to analyze the patterns in FDI in Pakistan in recent years, to study the determinants of FDI in Pakistan and to analyze those determinants and develop a model. For analysis purpose secondary data were used and Multiple regression model was estimated through SPSS using past nine years’ data from 2000-2008.From the coefficients it was concluded that foreign direct investment in Pakistan is affected by the Economic condition of Pakistan (GDP). Interest rate was inversely related to foreign direct investment. The exchange rate in a country is inversely related to foreign direct investment. Domestic investment is positively related to foreign direct investment. Foreign investors are more attracted to a certain country, if the level of domestic investment is high in that country. The Foreign direct investment is positively related to labor force that exists in Pakistan. Foreign direct investment is directly related to inflation rate in Pakistan. It is because, inflation in a country points to high supply of money. High inflation rate gives rise to high level of profits, which is why foreign investors are attracted. The infrastructure and foreign direct investment had negative relationship. This might be due to the extension of roads and infrastructure which does not contribute directly to the business activities. In short level of   FDI has great impact on the overall economy of Pakistan. When there is huge amount of inflow of FDI, the level of the employment, production level and foreign revenues will increase. The production level of the country will increase. Hence exports and foreign exchange will increase.

Keywords: Foreign Direct Investment, Interest Rate, Exchange Rate, Labors Force.