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“ IMPACT OF ECONOMIC DETERMINANTS OF FDI IN PAKISTAN”

A Synopsis of the MS (Economics) Thesis submitted to the Board of Advanced Studies and Research (BASR) for approval

Submitted by : HUNAIN ZAKI Supervisor : Prof. DrShafiqurRehman Date: _____________

novel proportions for unrelenting financial development. political. A transitional economy often looks outward in order to find the Opportunity for rapid growth. Globalization has opened the boundaries of different countries for foreigners to avail opportunities in the host countries. 1999). policy makers are naturally interested . Foreign direct investment is a section of a nation's countrywide monetary accounts. apparatus. and since than the government have gradually liberalized its trade and investment regime by providing generous trade and fiscal incentives to foreign investors through number of tax concessions. Because foreign investment offers many potential benefits to host countries. financial and cultural factors in the host economy. are linked to social. Accordingly during early 1980s.The shifting methods of worldwide business and the cross border mobilization of factor wealth in hunt of transactional manufacture. Even foreign Investment may help increase workers incomes. energy and insurance to FDI. the government further liberalized the policy and opened the sectors of agriculture. if it creates higher paying jobs in the host country. It’s the outlay of alien resources interested in national compositions. In the 1990s. Since foreign firms increase competition. INTRODUCTION: The significanceof foreign direct investment (FDI) flows is well documented in literature for both the developing and developed countries . expansion of business.Over the last decade foreign direct investment have grown at least twice as rapidly as trade (Meyer. market development and innovations. Inward FDI helps them acquire the Technology of the developed world and apply this more advanced technology to their industries. along with businesses. Transition economies may expect other benefits too. Returns on foreign direct investment (FDI). But. due to rapid political changes and inconsistency in policies the level of FDI remained low compared to other developing countries. economic. 2003). These reforms began to take hold in 1988. telecommunications. the government in Pakistan has initiated market-based economic reform policies. taking the form of profits. and tariff reduction and have also eased foreign exchange controls (Khan. credit facilities. It doesn’t incorporate foreign investment into the stock markets.1. Foreign Direct Investment is characterized as the foundation of acquirement of administrative power via a trade venture of overseas nation into a host nation. their presence may encourage greater efficiency in domestic firms.ii - .

It is not exaggerated to say that FDI plays essential role in the encouragement of national economic development. Many policy makers and academics struggle that foreign direct investment (FDI) can have important positive effects on a host country’s development effort (Alfaro.When domestic resources are short to finance the development requirements. the management authorities of each respective country needs to ensure stable economic and political environment. up to date management and marketing techniques . peace and security. law & order situation and consistency in the government policy because these all are the key factors for potential investors in making investment choices. India and Bangladesh. financial incentives. FDI has been the most important source of foreign Investment and an important source of technological spillovers.process of economic development in host countries. maintaining inflation rate. Particularly for DevelopingCountries like Pakistan. To enhance more FDI into Pakistan. provision of physical quality infrastructure. reduce duties.iii - . curtail external debt. 2003). encourage domestic investment. bringing innovative technology. . FDI is one of the most important forms of international capital flows.

Extensive empirical literature on determinants of inward FDI emphasizes the economic conditions or fundamentals of the host countries relative to the home countries of FDI as determinants of FDI flows. steady improvements in the credit quality of developing countries. 2003) taking market size. (Khan. lower yield in rich countries. quality of life and welcome attitude. 2001) concluded that most determinants of cross-country FDI are fairly fragile statistically. rising global interest rate and growing global payment imbalances. i. cost factor. Economic development of a country involves utilization of resources for increasing productive capacity. The study explored that sharp rise in private capital flows to developing countries come despite uncertainties caused by high oil prices.2. That is why (Chakra-barti. LITERATURE REVIEW: Systematic review of literature is highly important for research activity because it gives relatively inclusive information concerning the problem and provides an improved understanding to make objectives of the research study. (Lizondo. 1991) acknowledged a better choice by developing countries of foreign direct investment (FDI) rather than to depend on bank loans and bonds. Most of the studies utilize multiple numbers of theories or hypotheses in order to investigate the empirical linkage between FDI and variety of economic. local business environment. For South Asia.e. lack of political stability. government bureaucracy. The study identified a number of factors. The rise in capital flows to developing economies was basically driven by abundant global liquidity. infrastructure. In many developing countries such as Pakistan. and the expansion of investors interest in emerging market assets. . social and political variables. Though several empirical studies have been conducted concerning the factors determining FDI. determinants and trend of FDI are probed by (Sahoor. law and order situation. This literature is in line with (Dunning’s eclectic paradigm. political and social factors as determining variables. The determinants of FDI in Pakistan are estimated by (Shah and Ahmed. 2006). 1997) analyzed the factors responsible for lower level of FDI in Pakistan.iv - . quality of labor force. The literature on determinants of FDI in Pakistan is still young enough that most theoretical hypotheses are still grab up. utilization of resources is rendered impossible by the scarcity of domestic capital. government’s policies. economic strength.

1996) a relatively high interest rate in a host country has a positive impact on inward FDI. the higher the interest rate. 1998). infrastructure and political and macroeconomic stability that determines cross-country pattern of FDI.1993) which suggests that it is the locational advantages of the host countries e. 1989. As confirmed by various studies from (Veugelers. Culem. However the direction of the impact could be in a reverse if the foreign investors depend on host countries capital market for raising FDI fund. 1996) there is a positive effect of host country’s economic growth on FDI.The interest rate is the rate which is charged or paid for the use of money or more precisely the cost of borrowing. The growth of the host market is deemed to be significantfor expansionary direct investment (Clegg and Scott-Green. p. 1972. 1988 and Clegg 1995). Growth is also important because higher rates of economic growth are usually associated with an increase in the profitability of corporations (Gold. Higher Interest Rates implies more costly investment and. FDI flows to countries with increasing GDP and it leads to an increase in economic activity in the recipient country. skills. find that an increase in the interest rate leads to a decrease in FDI. -v- . A high level of economic growth is a strong indication of market opportunities. Therefore there is a positive sign between GDP and FDI. Marketsize exhibits existing demand in an economy while growth represents the future potential. 1998) have estimated that political stability. therefore. 2000) and (Erdal and Tatoglu. 2000) amongst others. level of technical labor force and mineral resources and liberal policies of the government attracted foreign investors in Pakistan. (Love and Lage-Hidalgo. Scaperlanda and Balough. According to (Gross and Trevino. (Grosse and Trevino.. 213). market size and income levels. The researcher has used prime lending rates because investors are lenders and borrowers. peaceful law and order situation. There exists relatively little support in the existing literature for this determinant of FDI as compared to the market size variable (Goldberg. 1983. the more it is likely to defer FDI and the relationship between FDI and the interest rate is expected to be negative. In fact growth rates are positively related to foreign capital stocks. 1991). Following this approach (Nishat and Anjum.g.

(Wint and Williams. In the theoretical context of either endogenous growth models or neo-classical there is a difference in the effect of FDI on the economic growth of the receiving country from their conventional equivalent.(Schneider and Frey.According to (Akinboade . 2007) and (Asiedu. (De Mello. (Yartey and Adjasi. 1985) find inflation and high balance of payments deficit negatively affecting FDI. Therefore the study expects a negative relationship in the regression analysis. The counterpart theory states growth in the framework of an open in contrast to a closed economy and the emergence of externality based growth models. 1994) show that a stable economy attracts more FDI thus a low inflation environment is desired in countries that promote FDI as a source of capital flow. while. while negative effects on growth have been more possible when FDI is drawn into heavily protected industries (Encarnation and Wells. (Carkovic and Levine. (Alfaro et al. 1998) find that inflation and inflation uncertainty adversely affect FDI.vi - . Any form of instability introduces a form of uncertainty that distort investor perception of the future profitability in the country. since FDI did not exert an exogenous impact on growth in financially developed markets. 2009) demonstrates that increased domestic inflation rate increases foreign investment via changes in the intertemporal consumption pattern of the agent. Likewise (Apergis and Katrakilidis. 1986). In sharp contrast to aforementioned studies. 2006) “low inflation is taken to be a sign of internal economic stability in the host country”. It is argued that FDI boosts economic growth indirectly where the direct transfer of technology augments the stock of knowledge in the recipient country through new management practices and organizational arrangements as well as labor training and skill acquisition. (Alfaro et al. . 1999). (Hasen and Gianluigi. For instance. 2007) proposed that FDI had a positive effect in countries with adequate developed financial economies. a study showed that the positive growth effects of FDI have been more likely when FDI is drawn into competitive markets. 2009) also find that measurement of government mismanagement such as inflation and high fiscal deficit act as disincentives for FDI to Arab Maghreb Union (AMU) countries. Regarding empirical evidence on macroeconomic policy and reforms. 2002) find a negative significant effect of inflation on FDI inflows. 2002) argued this view was not accurate.

. They use the Model of their study the linear Regression Model. This study would be of interest to policy makers in many developing countries where structural reforms are being implemented. To investigate the factors which affect Foreign Direct Investment. The broad objectives of this study are to analyze those factors which discourage and encourage FDI to Pakistanduring the study period. 2008) the Foreigner Investor may be attracted to come in the host country to invest their capital. 2008) in their study on telecom sector of Pakistan . HYPOTHESIS: Hypothesis plays significant role in the research which helps to solve problem in research model. Providing a clear picture to potential investors before they decide on using their investment in such country. To identify the risks if which the foreign investors bear while investing in Pakistan.They elaborate in their study that telecom sector started in 1990 and it will growth in the 2000. From this study we would be able to see which specific government policy is attracting or distracting FDI in Pakistan. 2. & Khan. The hypothesis of the study is stated as under: H1= interest rate has significant impact on FDI H2=GDP has significant impact on FDI H3= inflation rate has significant impact on FDI H4= Political Situations have significant impact on FDI 4. The main objective of the host country is to gain returns on these investments. to know about the trends and importance of FDI in Pakistan 3.vii - .3 . 3.OBJECTIVE OF THE STUDY: The main objectives of this study are mentioned below: 1. RESEARCH METHODOLOGY: According to (Azam and Luqman. Munir. There is no single theory suggesting explaining the FDI. The effects of Foreign Direct Investment upon Pakistan Financial situation. Moreover. (Hashim. Numerous researchers put forward a number of variables to explaining the inflow of FDI. 4.

ANOVAs are useful in comparing two. and Interest Rate. and therefore generalize t-test to more than two groups.Doing multiple two-sample t-tests would result in an increased chance of committing a type error.To assist our research and to run Regression which has been applied as an analytical technique for investing the impacts of variables on the FDI we apply ANOVA test for variability. for this purpose we have introduce the dummy variable in the estimated equation.Rate of inflation (INF). Furthermore. For this reason.2010 will be used to estimate the equation. Thus a total of 20 observations are used . ANOVA provides a statistical test of whether or not the means of several groups are all equal. Otherwise (For Political Instability) 5.The study utilizes the following model as per the above mention studies Y= β0+ β1GDP+ β2 INF+ β3 IR+ εt According to the above equation FDI is the positive product of GDP. Inflation Rate.variance and standard deviation. three or more means. FDI= Foreign Direct Investment GDP=Gross Domestic Product INF=Inflation Rate IR= Interest Rate ε = Error term The explanatory variables and error term (ε) will follow the least square assumptions. in this study we also check the effect of political situation on FDI.viii - . Economic growth (GDP). mean. Y = β0+ β1GDP+ β2 INF+ β3 IR+β4D +εt D = 1. The model consists of Three variables i. Variability refers tothe extent to which these data points differ from each other. Thereare four commonly used measures of variability: range.and Interest rate (IR) .e. DATA COLLECTION: Data collection is based on secondary data from official publications of each country. Where.Annual data of these variables for Pakistan over the period of 1990. For Political Stability = 0.

471–79.ix - . Ashfaque H. “The Location of Foreign Direct Investment. (1999). Harrow: Addison-Wesley. and Yun-Hwan Kim (1999) EDRC (Report Series No.. Khan.Saving and Development”.Applied Economics 31.“Multinational Enterprises and the Global Economy”. The data of FDI is collected from various issues of “Assets. (1993). Government of Pakistan. REFERENCES: Dunning. 66.for the test for the country.) Nishat. H. The data of all the other variables are from “50 Years of Pakistan” and various issues of “Pakistan Statistical Year Book” published by Federal Bureau of Statistics. All tests are conducted over the full sample. 4. 65–76. J. Billington.P. M. All the data refer to the end of the year. RESEARCH BODY:  Acknowledgement  Table of content  Abstract  Introduction  Review of Literature  Brief History of FDI in Pakistan  Methodology  Data Collection and Estimation  Conclusion and Policy Recommendation  References and Bibliography 7. Aqeel (1998). . Liabilities and Foreign Investment” published by State Bank of Pakistan. “The Empirical Determinants of Foreign Direct Investment in Pakistan. Data were collected from the annual report of State Bank of Pakistan. and A. Vol 24 No. and other Publications of the State Bank of Pakistan. N. P. An Empirical Analysis”. P. The exchange rate is extracted from the electronic data of “International Financial Statistics”. 6.P. Economic Survey of Pakistan.

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