Asian Journal of Economics, Finance and Management

2(3): 1-13, 2020; Article no.AJEFM.216

Impact of Foreign Direct Investment on Economic

Growth of Pakistan
Sarwat Sohail1* and Saima Shahzad Mirza2
1
Department of Business Administration, Virtual University, Lahore, Pakistan.
2
Department of Energy System Engineering, University of Agriculture, Pakistan.

Authors’ contributions

This work was carried out in collaboration between both authors. Author SS designed the study, wrote
the first draft, managed the literature review and wrote the results and discussion, while author SSM
helped in statistical analysis. Both authors read and approved the final manuscript.

Received 07 April 2020

Accepted 13 June 2020
Original Research Article
Published 20 June 2020

ABSTRACT

Impact of foreign direct investment on economic growth of Pakistan has been discussed in this
paper. This paper used the data for the time period 1996 to 2015 and statistical techniques, i.e.,
correlation matrix and regression analysis have been used to see the effect of independent
variable (FDI, exports, domestic capital, index of human capital and No. of terrorist attacks) on the
dependent variable GDP. The result shows that there is a significant relationship between foreign
direct investment and gross domestic product of the country. Other independent variables like
exports, domestic capital, Index of human capital and No. of terrorist attacks also affects the
economic development of the country. Expanded exports, more domestic capital and good human
capital support the economic growth and government should try to eradicate terrorism for attracting
more foreign investment.

Keywords: Exports; domestic capital; no. of terrorist attacks; FDI; GDP; index of human capital;
Pakistan.

JEL Classification: O10, O19.

1. INTRODUCTION investor can be an individual, a company or a

Government body. Foreign investment proves to
The foreign direct investment is very important be an important driver of economic development
for the economic development of developed and in developing countries [1]. It provides many
under developing countries. Foreign direct benefits to developing countries such as it brings
investment refers to the inflows of certain amount foreign capital and funds, technical skills as well
from one country to another country. This as technology which help them in boosting their
investment is different from an investment made economy [2]. In many ways economy of
on the purchase of shares. A foreign direct countries are affected by FDI, GDP rate,
_____________________________________________________________________________________________________

*Corresponding author: Email: ss.sarwatsohail@gmail.com;

 Sohail and Mirza; AJEFM, 2(3): 1-13, 2020; Article no.AJEFM.216
exchange rate and Government policies, but the
rate of GDP is mostly affected by foreign
investment. When foreign investment comes in a
country, it means business flourishes in that
country by producing more goods and services
which rises the GDP level of that country [3]. FDI
is not only fruitful for poor countries, but also for
developed countries, the main reason for
investing in developing countries is profit.
In case of Pakistan, although the country blessed
with natural resources, but unluckily inflows of
FDI are very low due to terrorism and political
instability [4]. According to Economic survey in
fiscal year 2017-18 per capita income of the
country increased, but not as per target and most
of the population lives below the poverty line.
The purpose of macroeconomic policy makers to
formulate the policies to reduce the effect of
inflation in the country and to attract foreign
funds in the country which help in reducing the
poverty [5]. Developing countries are interested
and tried to attract foreign investment [6]. Since
its independence in 1947, Pakistan tried to
attract foreign investment by introducing changes
in trade policies such as modifications in trade
policies, concessions in direct and indirect taxes,
tariff reduction and credit facilities for investors.
Currency exchange rate and more incentives and
protection for investors proved to be a plus point,
but the political condition of the country can’t be
ignored, which always effects the inflows of FDI
because the new ruling party brought novel
changes in policies [7].
Foreign direct investment not only provides
financing, but also delivers many benefits to the
country, e.g. transfer of technology, human
capital, the creation of a good business
environment and development of international
trade. The inflows of foreign investment from
developing countries are a reason of transfer of
advanced technology from developed countries
to Pakistan [8]. This transfer of technology
compels the local firm to adopt modern
technologies that maximizes the production by
using scarce resources [9]. Adaptation of
innovative technology creates a good business
environment in the sense of promoting
competition among enterprises which also boosts
the economy of the country. FDI has a significant
effect on human capital and can attach the more
inflow of FDI [10]. FDIs also influence the job
market when new businesses come into Pakistan
it creates more job opportunities for unemployed
people [11]. They paid high wages and
empowered them to enhance their living
standard. Increase in income leads to more
2
buying power that accelerates the economic
development of the country.
International free trade increases the export of
local products in international market, thus the
production of local industries increases on a
large scale which shows a significant impact on
the economic development of Pakistan [12].
Many studies have been done to see the positive
impact of economic growth and FDIs such as
[13] but some studies show that the impact of
economic growth and FDIs are negative such as
[14].
 Rationale of study
The objective of this study is to identify the
impact of foreign direct investment on economic
growth in Pakistan over the period of 1996 to
2015 and to determine how the economy of
Pakistan has been affected by foreign direct
investment during that period.
 Statement of Problem
How foreign direct investment has affected the
economic growth of Pakistan?
1.1 Background
To increase the rate of capital formation high
level of saving and investment is required, but
this is not possible in developing countries,
domestic saving always remains below the
desired level because of low per capita income
[15]. To fill this gap between saving and
investment FDI is a crucial tool that can increase
foreign capital inflows. Government of Pakistan
tries to develop liberal policies to overcome trade
barriers and encourage investors for
investments. In Pakistan, the history of FDI
showed that from 1976 to 1981 foreign investors
started their investment in Pakistan, but after that
it has been declining till 1987. In early 1990s,
Government of Pakistan started economic
restructuring to develop business activities and
attract investors [16] because of this foreign
investment increased from 1988 -1997 but after
that due to Pakistan nuclear test and Kargil war
with India it did not maintain its momentum and
went down in 1998-2001. Then again FDI in
Pakistan slightly went down after the incident of
9/11 in 2001 due to supporting the war against
terrorism till 2004. The momentum of foreign
investment inflows raised from 2008 till now 2017
except few years.
 Sohail and Mirza; AJEFM, 2(3): 1-13, 2020; Article no.AJEFM.216
1.2 Research Objectives
 To analyses that does economic growth in
Pakistan depends upon FDI.
 To explore the trend of FDI in last two
decades.
 To identify GDP has an association with
FDI.
 Recommendations for Government for
attracting more FDI in Pakistan.
1.3 Research Questions
 Does the FDI affect the GDP of the
country?
 What is the relationship between GDP and
FDI?
1.4 Significance of this Study
Since independence in 1947, Pakistan has
attracted much investment in the country; by
formulating liberal policies that will attract more
investors and will give a proper chance to local
investors to participate in the development of the
country’s economy. This study creates
awareness among the reader about the
importance of FDI in the economic development
of Pakistan. This study will show FDI’s
consequence on economy of Pakistan during
1996-2015. Pakistan faces a lot of issues like
nuclear test, Kargil war with India, war on
terrorism and political instability during that
period which has affected its economy badly and
brought a fiscal crisis in the country. The aim of
this study to see that how FDI and economic
growth of Pakistan is affected due to these
issues.
2. LITERATURE REVIEW
Foreign direct investment is defined as “An
increase in the book value of the net worth of
investment of one country held by the investor of
another country where the investments are under
the managerial control of the investor" [17]. From
last 20 years in the entire world the total volume
of FDI has been increased [18] in which the
South Asian, East Asian and Southeast Asian
countries are the main destination for
investments. To verify the relationship of FDI and
economic growth lot of studies have been done
which show that relationship of FDI and
economic growth either positive, negative or no
significant relationship between them. The
purpose of this study is to identify the impact of
FDI on economic growth of Pakistan by using
3
different variables and how the GDP of Pakistan
is affected by the terrorist attack.
The best way to attain economic growth is FDI
[19]. According to some researchers FDI is only
fuel for the economic upswing in developing
countries [20]. Different studies have been done
to support the relationship between the FDI and
economic growth which are as under:
[21] studied the panel data in a group of 70
developing and developed countries from 1998-
2002 by using Generalized Method of Moments
to identify the impact of FDI on financial
development and economic growth. They
concluded that in developing countries the effect
of FDI on economic growth is negative and
significant. The result of the study supported the
notion that low level of development of financial
sectors in developing countries and weak rules
and regulations that leads towards
misappropriate distribution of private capital
badly affect the economic performance of the
country.
[22] investigated the effect of FDI on import and
export of Pakistan by using the technique of co-
integration and error correction the study was
conducted considering the period from 1973-
2002. The result showed that in short and long
run influence of FDI on import is positive and FDI
has a negative effect on export in the short run
but in long run export positively affected by FDI.
[23] studied the effect of foreign capital inflows
on economic growth in Pakistan. The study was
conducted by considering the period from 1981-
2010 by using the technique of multiple
regression analysis on variables FDI, GDP,
remittance and external debt. The study showed
that the economic growth of the country is
positively affected by these variables.
The effect of FDI on GDP of Pakistan, studied by
[14] during the period from 1980 to 2006 using
the technique of least square method, the study
showed that the GDP of the country is not
affected by FDI.
[24] studied the impact of FDI on economic
growth of Pakistan by using the technique of
autoregressive distributed lag error correction
model. Variables used for this study were GDP
per capital, FDI, gross capital formation,
population, inflation and trade. The study
covered the data from 1966-2014 and concluded
that in the long and short run there is positive
relationship between FDI and economic growth
 Sohail and Mirza; AJEFM, 2(3): 1-13, 2020; Article no.AJEFM.216
of the country. [13] Studied the effect of FDI and
trade openness on economic growth in Pakistan.
The study was conducted by considering the
period from 2008 to 2013. The result showed that
trade openness, domestic capital and FDI have a
positive impact on economic growth.
The relationship of foreign remittance, FDI,
imports and economic growth were investigated
by [25]. The study conducted by considering the
period of 1977 to 2013 by using the time series
econometric technique and it revealed that
foreign remittance and FDI positively affect the
economy.
The relationship of FDI and GDP in Pakistan is
studied by [26] where GDP is used as dependent
variable and labor force, domestic capital and
FDI are used as independent variables and the
result showed that in the long run and in the
short run the link between FDI and GDP is
positive. Government tries to attract more FDI for
the economic progress of the country.
FDI creates more jobs which increase the
income of people, because of more income
consumption expenditure rises. More
consumption expenditure leads towards more
Fig. 1. Relationship between dependent and independent variables
4
goods and services which ultimately raise the
price of good and services. [27] studied the
impact of FDI and consumer price index on
economic growth of the SAARC member of a
nation, the data belongs to the years 2001-2010.
The conclusion of the study was that economic
growth and FDI of countries has a positive
association while it showed that FDI and the
consumer price index has negative relationship.
This result was concluded by using multiple
regression analysis.
2.1 Theoretical Framework
The objective of this paper is to study the impact
of FDI on economic growth of Pakistan, where
economic growth is dependent variable and
foreign capital, terrorist attack, domestic capital,
human capital and export are independent
variables. These variables have already been
studied in different researches in the context of
Pakistan, but contribution of this study is the
selection of that specific time period which
affected the Pakistani economy in different ways
like nuclear test war with neighbor countries and
economic slump after 9/11. The relationship
between dependent and independent variables is
shown as under:
 Sohail and Mirza; AJEFM, 2(3): 1-13, 2020; Article no.AJEFM.216
 Foreign Capital
The capital that inflows in a country because of
foreign direct investment is called a foreign
capital. It is vital and substantial variable for
economic development of the country. Foreign
capital proves to be helpful in boosting the
economy of that country. Foreign direct
investment is basically a collection of equity
capital, reinvestment of earnings and other
capitals. Data were taken from the World Bank,
which was in US dollars. During the period of
1996 to 2015 the minimum value of FDI for
Pakistan was 0.31 billion US dollar in 2000 and
maximum value was 5.59 billion US dollar in
2007.
 Domestic Capital
Gross capital formation is comprised of addition
in fixed assets within country and net change in
inventories. The fixed assets are in the form of
new machine, equipment, infrastructure,
construction of schools, railway, commercial
buildings, hospitals etc. This variable is used by
[13] in his research paper the reason behind the
selection of this variable in my study used to see
whether the country has its own reserves which it
can use for growth. More domestic capital means
less reliance on foreign debt, if a country has a
foreign debt its means that country losses its
money and decreases the economic growth. FDI
boost up the economic growth of the country
which ultimately increases the domestic capital.
This variable will show that during 1996-2015
how much domestic capital Pakistan have and
how it affected the economic growth of Pakistan.
In 1999 domestic capital has a minimum value of
9.8 billion US dollars in 1999 and reached at $
42.5 in 2015. This study is intended to
investigate the contribution of domestic capital in
economic development from 1996-2015 and data
are collected from trading economic in billion US
dollars.
 Human Capital
Human capital is considered as an important
asset for the development of an economy,
without efficient and competent workforce an
economy can’t develop. Human capital is a
measure of skills, education, capacity and
attribute of the work force which influence their
productivity and earning potential. In this
research, human capital index per person is used
as human capital to show the effect of this
variable in the economic development of
5
Pakistan during 1996 to 2015. This index is
based on year of schooling and return to
education. This variable is used in the study of
[28]. The reason of the selection of this variable
is for economic development, FDI plays an
important role and we only bring foreign
investment in our country if we have skilled,
knowledgeable and technically expert human
capital. Technically educated and export workers
can work more efficiently as compared to less
educated workers and increase the GDP by
accelerating the production process.
 Exports
Goods and services produced domestically and
purchased by foreigners are called export. Export
includes freight, insurance, travel, merchandise,
license fee, royalties and lots of services like
Government services, banking, financial,
communication, and constructions, personal.
Export data in this study are presented in billion
US dollars. FDI helps in production of more
standardized, export quality and goods and
services in the country Export increases the
foreign reserves; more goods and services are
exported rest of the world will result in rising the
foreign reserves which promote the economic
growth of the country. In this study the data
regarding the export of the country have been
collected from the site of the global economy
from 1996 to 2015. During that time period the
minimum value of export was 9.67 billion US
dollars in 1999 while maximum value was 30.7
billion US dollars in 2013.
 Terrorism
Terrorism affects the political, social and
economic situation of the entire world. War
against terrorism in Pakistan is also burning
issue which seriously affected the Pakistani
economy. Literacy, unemployment, unequal
distribution of wealth and poverty is some of the
reasons of terrorism in Pakistan. "Total Terrorist
attacks" is used as a proxy for measuring the
terrorism in Pakistan for the time period of 1996
to 2015 similar to the other study by [29].
Peaceful condition of law and order in the
country is one of the basic reasons for attracting
foreign investment. Terrorist attacks during that
specific period of study (1996 to 2015) has
meaningful impact on FDI and economic growth.
For calculating the “Total Terrorist Attacks” sum
up all types of attacks like bombing, car bombing,
suicides attack, kidnapping etc. in a year. Data is
collected from Global terrorism database.
 Sohail and Mirza; AJEFM, 2(3): 1-13, 2020; Article no.AJEFM.216
 Economic Growth
Another important variable of this study is
economic growth. Economic growth shows the
ability of countries to produce more goods and
services. Economically developed countries can
improve its economic, political and living
standard of its people. The same variable is used
by [29] in his study. For the measurement of
economic growth during 1996 -2015 GDP per
capita is used as a proxy. GDP is gross domestic
product, which are produced within a country in a
year. For calculating the GDP per capital divides
the annual production of goods and services in a
country by population. In this study economic
growth is used as the dependent variable. The
data are collected from the site of the global
economy and data is in billion US dollars.
2.2 Proposed Hypotheses
H1= There is a significant relationship between
FDI and economic growth.
H01= There is no significant relationship
between FDI and economic growth.
H2= There is a significant relationship between
domestic capital and economic growth.
H02= There is no significant relationship
between domestic capital and economic growth.
H3= There is a significant relationship between
export and economic growth.
H03= There is no significant relationship
between export and economic growth.
H4= There is a significant relationship between
human capital and economic growth.
H04= There is no significant relationship
between human capital and economic growth.
H5= There is a significant relationship between
terrorist attack and economic growth.
H05 = There is no significant relationship
between terrorist attack and economic growth.
3. RESEARCH METHOD
Type of research in the current study is
quantitative because I have collected numerical
data of variable during the period from 1996 to
2015. This study has selected this time frame
because Pakistan faces a lot of issues like
nuclear test, Kargil war with India, war on
6
terrorism and political instability during that
period which has affected its economy badly and
brought a fiscal crisis in the country. The
collected data will be analyzed and statistically
expressed in tables and graphs.
3.1 Research Paradigm
In this research deductive approach is used
because this approach emphasizes the data
collection and this research has quantitative
data. The other reasons to adopt this approach
are that in this research hypothesis are
developed and statistical technique is used for
testing these hypotheses and relationship of this
approach with positivistic paradigm and depend
upon statistical facts.
3.2 Nature of Research Study
In this research explanatory research approach
is used which show the impact of FDI on
economic growth of Pakistan. The reason behind
the selection of this approach is it shows cause
and effect relationship between variables. In this
research, economic growth is dependent variable
and export, domestic capital, human capital,
terrorist attack, foreign capital are independent
variables. This type of research approach will
show the effect of independent variables on the
dependent variable.
3.3 Data Collection Sources
For this research data will be collected from
secondary source. The secondary sources of
data are the World Bank, trading economic and
global terrorism database.
3.4 Data Collection Tools
For data analysis the statistical tool which I will
use for this study is SPSS.
3.5 Subjects
In this study secondary data is used regarding
FDI, GDP per capita, domestic capital, exports,
human capital, terrorist attacks and non-
probability sampling technique is used.
3.6 Data Processing, Analysis Technique
& Interpretation
For processing and analysis purpose, data are
collected from the websites of the World Bank,
site of the global economy, human development
Index of Pakistan, terrorism database and trading
economies. This data is secondary source data
 Sohail and Mirza; AJEFM, 2(3): 1-13, 2020; Article no.AJEFM.216

that is available on web sites. For data TA = Terrorist Attack

processing SPSS software is used and analysis = Error
techniques which are used in this research i.e.
Regression and correlation. The purpose of Gross Domestic Product: GDP is the most
using these techniques first regression analysis important measure of the economy’s output. If
shows the relationship between dependent and the GDP is increasing it shows that production,
independent variables and correlation analysis employment, exports is going up and balance of
show the level of association between dependent payment is positive, increasing in FDI, domestic
and independent variables. capital. GDP of Pakistan shows that there is an
increasing trend in GDP from 1996 to 2015 with
Regression Equation: little bit fluctuations. The highest value of GDP is
$270.556 billion in 2015 and the lowest value in
Economic growth = + 1FC + 2DC + 3HC + recorded in 1998 which is $ 62.19 billion.
4E + 5TA +
Total Exports: Exports shows that there are
Where: more economic activities in the country which
accelerate the GDP of the country. The total
= constant exports of Pakistan are continuously increasing
= co efficient of independent variable from 1996 to 2015. Graph 2 shows that export of
Economic Growth = dependent variable Pakistan is rapidly increasing in 2011 which is $
FC = Foreign Capital 2.83 billion as compared to previous years. The
DC = Domestic capital highest value of exports is at $ 30.7 billion in
HC = Human capital 2013 but the lowest value is at $ 9.67 billion in
EX = Export 1999.

GDP of Pakistan in Billion $

300

200

100

0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

GDP Billion $

Graph 1. Gross domestic product

Exports Billion $
40
30
20
10
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

Export Billion $

Graph 2. Total exports

7
 Sohail and Mirza; AJEFM, 2(3): 1-13, 2020; Article no.AJEFM.216

Table 1. Data of dependent and independent variables

Years Dependent Independent variables

variable
GDP Exports FDI Domestic capital Index of human No. of terrorist
Billion $ Billion $ Billion $ Billion $ capital per person attacks
1996 63.32 10.7 0.92 12.03 1.46927 6
1997 62.43 10.4 0.72 11.19 1.48909 2
1998 62.19 10.25 0.51 11.01 1.50916 6
1999 62.97 9.67 0.53 9.8 1.52951 2
2000 73.95 9.94 0.31 12.74 1.55013 2
2001 72.31 10.6 0.38 12.29 1.60251 2
2002 72.30 11.01 0.83 11.99 1.65667 14
2003 83.24 13.92 0.53 13.95 1.71179 8
2004 97.97 15.35 1.12 16.24 1.75520 19
2005 109.502 17.18 2.2 20.89 1.79972 11
2006 137.264 19.4 4.27 26.54 1.79762 30
2007 152.386 20.14 5.59 28.63 1.79551 34
2008 170.078 21.06 5.44 32.66 1.79341 40
2009 168.153 20.84 2.34 29.51 1.79130 50
2010 177.407 23.98 2.02 28.04 1.78920 148
2011 213.587 29.83 1.33 30.16 1.78712 64
2012 224.382 27.82 0.86 33.83 1.78505 206
2013 231.219 30.7 1.33 34.58 1.78299 77
2014 244.361 29.92 1.87 35.76 1.78093 18
2015 270.556 28.69 1.62 42.4 1.78090 25
In this paper data has been collected from the site World Bank, the global economy, human development Index
of Pakistan, terrorism database and trading economies. In this paper scaling variable used is billion $

FDI Billion $
6

0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

FDI Billion $

Graph 3. Foreign direct investment

Foreign Direct Investment: Foreign investment
is a crucial indicator for the economic
development of the host country. It allows the
more capital inflow in the country and creates
more opportunities in the country. Foreign
investment in Pakistan shows an upward trend in
2004 and goes down in 2012. Again in 2013
foreign investment shows an upward trend, but
again in 2015 it goes down. The highest value of
foreign direct investment in 2007 which is $ 5.44
billion and the lowest in 2000 which is $ 0.31
billion.
Domestic Capital: Domestic capital is the main
source of sustainable economic growth.
Domestic capital of Pakistan was at its
peak in 2015 with the amount of $42.4 billion and
was its lowest point in 1999 amounting $9.8
billion.
Index of Human Capital per Person: Educated,
trained and skillful workforce can increase the
productivity and can be the reason of economic
growth. According to FRED economic data
Human Capital per Person Index of Pakistan was

8
 Sohail and Mirza; AJEFM, 2(3): 1-13, 2020; Article no.AJEFM.216

at its lowest value 1.46 in 1996 which increased
continuously till 2005 and remained stable till
2015.
Number of Terrorist Attacks: Terrorism has a
negative effect on the development of the
country’s economy. Terrorism also increases the
government spendings and reduces the foreign
investments consequently GDP of the country
goes down. According to statistics of terrorism
data base incidents of terrorism escalated from
2006 to 2013.

Domestic Capital Billion $

50
40
30
20
10
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Domestic Capital Billion $

Graph 4. Domestic capital

Index of Human Capital/ Person

2

1.5

0.5

0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

Index of Human Capital per person

Graph 5. Index of human capital

No. of Terrorist Attacks

300
200
100
0
1996
1997
1998
1999
200
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

No. of Terrorist Attack

Graph 6. No. of terrorist attacks

9
 Sohail and Mirza; AJEFM, 2(3): 1-13, 2020; Article no.AJEFM.216

4. RESULTS AND DISCUSSION relationship between exports and GDP. Similarly

Correlation matrix measures how strongly the
variables are related to each other. In this study
the correlation matrix shows that exports is
correlated to GDP and likewise other
independent variables domestic capital, index of
human capital and No. of terrorist attacks are
correlated with GDP which is our dependent
variable. Only one independent variable FDI is
not showing any association with dependent
variable GDP in this matrix.
Correlation coefficient measures the relationship
between two variables in term of strength and
direction. Correlation coefficient shows that how
much change in the value of one variable can
change the value of another variable. In our
study significant level is 0.05 and significant
levels of coefficient is assured by using the t-
test. In our study p value of exports is 0.000
which is less than the significance level 0.05 so it
reject the null hypothesis of our study that there
is no significant relationship between exports of
economic growth (GDP) and accept the H1
hypothesis that there is a positive and significant
the p values of FDI and domestic capital are also
0.000 which is less than significant level 0.05 and
it reject the null hypothesis and prove that there
is a positive and significant relationship between
GDP, domestic capital and FDI. But the p value
of index of human capital 0.12 is more than
significant level 0.05 and it accepts the null
hypothesis that there is no significant relationship
between GDP and index of human capital.
Similarly, No. of terrorist attacks in not significant
because its p value 0.5 is greater than the
significance level 0.05. Standardized beta show
that how much dependent variable would be
changed by changing one unit in the
independent variable. Exports shows positive
correlation so change in one unit of exports bring
37% increase in GDP similarly FDI has a positive
relationship with GDP, so change in one unit of
FDI brings 13.5% change in economy same goes
with domestic capital that change in one unit with
independent variable will increase the overall
economy by 74%, but index of human capital and
No. of terrorist attacks have negatively affected
the economy and decrease the overall economy
by 55% and 15% respectively.

Table 2. Correlation matrix

GDP Exports FDI Domestic Index of human Terrorist

capital capital attacks
GDP 1
Exports .980** 1
FDI 0.325 0.323 1
Domestic capital .976** .947** .501* 1
** ** ** **
Index of human capital .755 .790 .571 .807 1
No. of terrorist attacks .571** .607** 0.086 .537* .486* 1
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed)

Table 3. Correlation coefficient

Model Unstandardized Standardized t P

coefficients coefficients
B Std. error Beta
1 (Constant) 25.114 28.541 .880 .394
Exports 3.398 .654 .372 5.197 .000
FDI 6.028 1.218 .135 4.948 .000
Domestic Capital 5.013 .475 .744 10.559 .000
Index of Human Capital -31.413 19.489 -.055 -1.612 .129
No. of Terrorist Attacks -.021 .030 -.015 -.693 .500
a. Dependent Variable: GDP

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 Sohail and Mirza; AJEFM, 2(3): 1-13, 2020; Article no.AJEFM.216
Table 4. Model summary
Model R R square Adjusted R square
a
1 .998 .996 .994
Predictors: (Constant), Exports, FDI, Terrorist Attacks,
Index of Human Capital per Person, Domestic Capital
4.1 Regression Analysis
Model summary of regression analysis shows
that the dependency of the dependent variable
on independent variables. The value of R
Square determines the strength and weakness
of the relationship of dependent and independent
variables. If the value of R Square is less
than 50% it shows the weak relationship, if the
value is more than 50% it shows that there is a
strong relationship between dependent
variable and independent variables. In our
study the value of R square is 99%, which
proves that there is perfect strong relationship
between dependent variable GDP and
independent variables (exports, FDI, domestic
capital, index of human capital and no. of terrorist
attacks). The coefficient of determination of R
square shows that independent variable the
variation of 99% is explained by its predictors
variables which are FDI, domestic capital, index
of human capital, No. of terrorist attacks, and
exports.
5. CONCLUSION
The role of FDI in shaping the economy of the
country is very obvious. This paper shows the
impact of FDI on the economic growth of the
Pakistan from 1996-2015. In the literature review
most of the studies show that there is positive
and significant relationship between FDI and
economic growth of the country. In this paper, it
is also revealed that there is positive relationship
of FDI on economic growth of the country, but it
is also shown that not only FDI but other
variables is also important for the economic
growth of the country. For economic growth,
exports of the country are also noteworthy,
exports show an increasing trend during selected
time period 1996- 2015 which shows that exports
also participate in accelerating the economic
activities of the country. Domestic capital is also
important factor and shows that it boost the
economy of the country. Proper and maximum
utilization of human capital boosts the economy
of the country. Graph 5 shows the index of
human capital and it demonstrates that it
continuously increases from 196 to 2015. The
number of terrorist attacks has an inverse effect
11
Std. Error of the estimate R square change
5.33528 .996
on the progressing economy, it slows down the
economic activities and reduce the GDP.
In the correlation analysis, independent variables
exports, FDI and domestic capital show
significant and positive relationship with GDP,
but index of human capital and terrorist attacks
have a negative relationship with GDP it shows
that when No. of terrorist attacks increase
obviously economic activities goes down and
consequently GDP of the country goes down.
Index of human capital shows that with respect to
economic growth how much human capital is lost
by the country. Coefficient of determination of R
square shows that 99% variation in the
dependent variable which is GDP is explained by
all independent variables FDI, exports, domestic
capital, index of human capital and No. of
terrorist attacks. The regression analysis also
proves that the relationship is perfectly strong
between dependent and all independent
variables which also support our hypothesis and
reject the null hypothesis.
6. FURTHER RECOMMENDATIONS
The result of the study not only show the impact
of variables on GDP, but also provides new
direction for current and potential prospective
investors for foreign investment, but also gives
new direction to policy makers to make policies
according to the situation faced by Pakistan.
Potential investors can analysis the economic
situation and Government policies for further
investment. Exports, human capital and
domestic capital are all increasing during 1996-
2015 which is a good sign for foreign investors to
invest in the country. The increasing trend in
exports shows more economic activities and
human capital shows that human resources
are at full utilization and will give maximum
output.
Pakistan faces a tough situation in term of
terrorist attacks from 2006 to 2014, but after that
government devise policies and overcome this
problem which will attract foreign investment.
Peace and harmony in society are also important
for attracting foreign investment. Now
terrorist activities are under control in Pakistan
 Sohail and Mirza; AJEFM, 2(3): 1-13, 2020; Article no.AJEFM.216

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