Macroeconomic factors determining FDI impact on Pakistan's growth

Macroeconomic factors determining FDI impact on Pakistan's growth Purpose – The purpose of this paper is to identify major macroeconomic factors that enhance foreign direct investment (FDI) for Pakistan through the co‐integration and error correction model over a 28‐year time period, i.e. between 1980 and 2008. Design/methodology/approach – The study employed the Johansen co‐integration technique to estimate the long‐run relationship between the variables, while an error correction model was used to determine the short‐run dynamics of the system. Findings – Finding suggests that FDI has had a significant positive impact on Pakistan's economic growth in the long run. For example, trade liberalization and their interactive terms have a positive effect in the short run, while a negative effect is observed in the long run upon economic growth of Pakistan. The results indicate that due to a low quality of human capital in Pakistan; the direct effect of FDI on economic growth becomes negative. Research limitations/implications – The study was limited to a few variables, including human capital, trade openness, government size, population and consumer price index, in order to manage robust data analysis. Practical implications – The authors find that for FDI to be a significant contributor to economic growth in Pakistan, government must focus upon improving physical infrastructure, and quality of human resources. Originality/value – The study confirms that Pakistan did not enjoy substantial growth benefits from FDI because human capital, trade openness, government size and interactive terms of FDI and per capita income have a negative impact on economic growth. These findings have important policy implications. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png South Asian Journal of Global Business Research Emerald Publishing

Macroeconomic factors determining FDI impact on Pakistan's growth

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Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
2045-4457
DOI
10.1108/20454451211207598
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to identify major macroeconomic factors that enhance foreign direct investment (FDI) for Pakistan through the co‐integration and error correction model over a 28‐year time period, i.e. between 1980 and 2008. Design/methodology/approach – The study employed the Johansen co‐integration technique to estimate the long‐run relationship between the variables, while an error correction model was used to determine the short‐run dynamics of the system. Findings – Finding suggests that FDI has had a significant positive impact on Pakistan's economic growth in the long run. For example, trade liberalization and their interactive terms have a positive effect in the short run, while a negative effect is observed in the long run upon economic growth of Pakistan. The results indicate that due to a low quality of human capital in Pakistan; the direct effect of FDI on economic growth becomes negative. Research limitations/implications – The study was limited to a few variables, including human capital, trade openness, government size, population and consumer price index, in order to manage robust data analysis. Practical implications – The authors find that for FDI to be a significant contributor to economic growth in Pakistan, government must focus upon improving physical infrastructure, and quality of human resources. Originality/value – The study confirms that Pakistan did not enjoy substantial growth benefits from FDI because human capital, trade openness, government size and interactive terms of FDI and per capita income have a negative impact on economic growth. These findings have important policy implications.

Journal

South Asian Journal of Global Business ResearchEmerald Publishing

Published: Mar 2, 2012

Keywords: Pakistan; Macroeconomics; Economic growth; International investments; Foreign direct investment; Trade liberalization; Human capital; Government size; Co‐integration

References

  • Is government spending stimulative?
    Aschauer, D.A.
  • Foreign direct investment, economic growth and financial sector development: a comparative analysis
    Choong, C.K.; Yusop, Z.; Soo, S.C.
  • Foreign direct investment‐led growth: evidence from time series and panel data
    De Mello, L.R. Jr
  • Maximum likelihood estimation and inference on cointegration – with application to the demand for money
    Johansen, S.; Juselius, K.
  • Numerical distribution functions of likelihood ratio tests for cointegration
    MacKinnon, J.G.; Haug, A.A.; Michelis, L.
  • How does foreign investment affect economic growth in China?
    Zhang, K.H.

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