Introduction:Foreign Direct InvestmentForeign DirectInvestment (FDI) is commonly known as a cross-border investment which is madeby an investor with a view to establishing a lasting financial interest in anindustry/enterprise and trying to exert a degree of influence on the operationof the enterpriser and where the foreign investor holds an interest of at least10% in equity capital.
FDI is often mentioned as a lead driver for economicgrowth and thought to bring certain benefits to national economies. It cancontribute to Gross Domestic Product (GDP), Gross Fixed Capital Formation(total investment in a host economy) and balance of payments.Research ProblemIn the past,very few studies have dealt in determining the interactions between foreigndirect investment (FDI) and the economic development of the home country (Pakistan).
It is for this purpose that this study will explain the interaction between FDIand the home country’s economy/economic development. In this study, the focuswill be on determining the impact of foreign direct investment in the Pakistan’sEconomy. This study also attempts to determine how foreign direct investmenthas been able to enhance the performance of the Economy of Pakistan, which iscommonly known as one of underdeveloped economy in the world. Research ObjectiveThis study will attempt to identify howforeign direct investment affects the economy of Pakistan. Basically, thisstudy aims to study the economy of Pakistan by reviewing relatedarticles, papers and conducting survey to knowledgeable individuals such aseconomists, businessmen and other business personalities. The primary objectiveof this study is to examine and determine the perception of economists,businessmen and other business personalities regarding the (Positive orNegative) impact of foreign direct investment on the economy of Pakistan. To address this objective, I will explore the nature of economy and foreigndirect investment in PAKISTAN:its benefits and advantages to the country. The objectivesof this study will be to: Identify the factors in foreign direct investment that affects economy of Pakistan.
Identify how the economy of Pakistan progresses through Foreign Direct investment, Apparently,a survey is conducted to the economists, investors, businessmen and otherbusiness personalities to determine what attributes affect the economy of Pakistan.Finally, this research aims to come up with pertinent findings, and providesinsightful recommendations for the progress of Pakistan economy. ResearchQuestion: This study will attempt to answer the following questions:1. What are the related factors withinforeign direct investment affecting the economy of Pakistan?2. What are the advantages of foreigndirect investment to the economy of Pakistan?3. What is the perception of therespondents regarding foreign direct investment?Literature Review Stimulation of national economy FDI is thought to bring certain benefits to nationaleconomies.
It can contribute to Gross Domestic Product (GDP), Gross FixedCapital Formation (total investment in a host economy) and balance of payments.There have been empirical studies indicating a positive link between higher GDPand FDI inflows (OECD a.), however the link does not hold for all regions, e.g.over the last ten years FDI has increased in Central Europe whilst GDP hasdropped.
FDI can also contribute toward debt servicing repayments, stimulateexport markets and produce foreign exchange revenue. Subsidiaries ofTrans-National Corporations (T Stimulation of nationaleconomy FDI is thought to bring certain benefits to national economies. It cancontribute to Gross Domestic Product (GDP), Gross Fixed Capital Formation (total investment in ahost economy) and balance of payments.
There have been empirical Studies indicating a positive link between higher GDPand FDI inflows (OECDa.), however the link does not hold for all regions, e.g.over the last ten years FDI has increased in Central Europe whilst GDP hasdropped. FDI canalso contribute toward debt servicing repayments, stimulate export markets andproduce foreign exchange revenue. Subsidiaries of Trans-National Corporations (TNCs),which bring the vast portion of FDI, are estimated to produce Around a third of total global exports.
However,levels of FDI do not necessarily give any indication of the domestic FOREIGN DIRECT INVESTMENT IN PAKISTAN:POLICY ISSUES AND OPERATIONAL IMPLICATIONS A summary of host country determinants of FDI in general is givenshortly. In view of these determinants, the fundamental requirement thatgoverns foreign investment in Pakistanrevolves around ten main factors, which could be called the ten checkpoints.These are political stability; law and order; economic strength; governmenteconomic policies; government bureaucracy; local business environment;infrastructure; quality of labor force; quality of life; and welcoming attitude(see Shirouzu 1993). Economic effect:What was the impact on Pakistan’s imports and exports?First, most empirical research suggests that inflow of FDI tends to increasethe host country’s imports. One reason is that MNCs often have a highpropensity to import intermediate inputs, capital goods, and services that arenot readily available in the host countries.24 Some studies indicate that theimpact of FDI inflow on a host country’s imports is either nil or that itslightly reduces the level of imports (Hill 1990). If FDI is concentrated inimport substitution industries, then it is expected to affect importsnegatively because the goods that were imported are now 22See, for example, Fry(1996), WTO (1996), and Bornstein et al. (1995).
23See Lipsey and Weiss (1981,1984); Hummels and Stern (1994); Graham and Anzai (1994); and Naujoks andSchmidt (1995). 24See Graham and Krugman (1993), Graham and Anzai (1994), Hill(1990), and Naujoks and Schmidt (1995). 22produced in the host country by foreign investors (Fry1996). In order to examine the impact of FDI on Pakistan’s imports, we tested animport demand function.25 Results suggest that the inflow of FDI increasesimports with a lag of one year. The coefficient is statistically significantwith a positive sign and suggests that a 10% increase in the inflow of FDIincreases imports by 1.8 percent. Income elasticity of import demand is lessthan unity (0.
8) indicating that a 10% increase in real GDP increases importsby 8 percent. 3 Bi-DirectionalCausality between FDI & Savings: A Case Study of Pakistan:The positive impact of FDI on economic growth has been empiricallyproved for small developing economy like Pakistan. It is revealed ineconomic literature that causal association between said variables is mixed dueto heterogeneity among economies, diverse nature of long and short run impactsand openness to trade (Bashier and Bataineh (2007); Savi, 2004; Shoter, &Abdulrazag, 2001; Chakraborty, 2002; Borensztien, 1998; Usha & Diana, 2001;Parantap, 2003). The linkage between savings and FDI has been highlighted byChang, (1995) and supported the fact that FDI improves levels of domesticsavings rather than decreasing. Similarly, Bashier and Bataineh (2007)investigated relationship between FDI & savings and found combination inlong span of time between said actors.
Furthermore it is concluded that FDI iscomplementary for national savings in the case of Jordan. FDI plays a positivedevelopmental role as mentioned by Chen (1992). Especially in the hostcountries FDI creates a positive effect on economic growth like Pakistanbecause it comprises of certain very important factors like capital, technologymanagement, and market access (Shahbaz, et al., (2007).4 Economicevaluation of foreign direct investment in Pakistan(MAHR MUHAMMAD YOUSAF, ZAKIR HUSSAINand NISAR AHMAD) Foreign Direct Investment (FDI) in Pakistan is one of the majorexternal sources of funding to meet obligations of resources gap and goalachievement. FDI has played a vital role in the economic growth of Pakistan. FDIcontributed significantly in the human resources development, capitalformation, and organizational and managerial skills of the people in thecountry. Total foreign investment was $ 6.
0 billion, of which FDI amounted to $4.16 billion in the year 2007. The present research study empirically analyzedthe impact of FDI on Pakistani imports and exports through time series data.The study applied the Unit Roots test to check the stationary of the dataseries used in the analysis. Cointegration technique was used to analyze thelong run relationship among the variables. Error Correction Model was used forfurther analysis.
The results of the import model showed that FDI positivelyimpacted real demand for imports in the short run and in the long run. In caseof one percent increase in FDI; real demand for import would increase by 0.08percent in the short-run and 0.52 in the long run.
The results of export modelshowed that FDI has negative relation with real exports in the short-run and positiverelation in the long run. The export model estimations indicated that with onepercent increase in FDI, real export decreased by –0.08 percent in theshort-run and increased by 1.62 percent in the long run.MethodologyThe study intends to identify the impactof foreign direct investment in the economy of Pakistan.
For this study, primary research and secondary research will beused. Primary research will be conducted using the data that comes from thechosen respondents. The data about the respondents’ perception regardingforeign direct investment and economic growth of Pakistan will then be presented. Further, primary research is conducted using questionnaire surveysthat will be sent to the respondents. Here, the questionnaires will be used tocollect quantitative data and the interviews will be used to providequalitative insights into the data collected. This study will also employ qualitative research method. Throughthis method, qualitative elements that do not have standard measures such as behavior,attitudes, opinions, and beliefs about FDI will be analyzed. ResearchPlan:For this study, I will gather data, collect publishedstudies and articles from related journals; and make a content analysis of thecollected documentary and verbal material related to the topic as well as theoverall definition and perception about foreign direct investment and economicgrowth/economy.
Afterwards, I willsummarize all the information; make a conclusion from the gathered data andthen recommendations will be provide. Survey/ Questionnaire Structure:In this study I will design a questionnairefor the survey. The primary aim of the questionnaire is to determine the effectof foreign direct investment on the economy of Pakistan. This study will use a mixtureof closed questions and open comments in the questionnaire. A closedquestion is one that has pre-coded answers. The simplest is thedichotomous question to which the respondent must answer yes or no. Throughclosed questions, I will be able to limit responses that are within the scopeof this study.
Thus I will design a closed question type to remain focused onthe statement of the problem and on the main purpose of the study. In addition, closed questions willbe used in the survey because the answers are easy to analyse and arestraightforward, as target respondents are mostly busy that they do not haveenough time to give attention to open questions. Closed responsequestions save the respondent time.Respondents ofthe StudyIn this study Iwill select limited number of respondents. The respondents may includeeconomists, businessmen, other business personalities and those people haveknowledge of the concern topic. DataAnalysisI will prepare a questionnaire and alsoguide questions for the interview that will be asked to the intendedrespondents. The data collection instrument will be a structured questionnairethat will be designed and based on Likert scale. A Likert Scale is arating scale that requires the subject to indicate his or her degree ofagreement or disagreement with a statement and the respondent will choose onefrom the given five response choices.
Administrationof the Instrument Moreover, structured interview will be used inthis research study. Structured interview is a kind of interview thatpromotes a question and answer process. It is composed of detailed explicitquestions.
These questions will be asked from interviewee to clarify theunclear statements about FDI and its role in economy. All the process will beremain objective rather than subjective (there will be no personal like ordislike).Cost and TimeThe outcome ofthis study will be limited only to the information gathered from books,internet and journals and from the primary data gathered from the result of thequestionnaire survey and interview and the survey will be conducted only in Peshawar and Nowshera. Asthe research was completed in a relatively short period of time other factorsand variables are not considered. This might have an impact on the results ofthe study. The financialresources are also constraint that I can’t make long survey and the secondmajor reason is the bad condition of Pakistan now days. References 1.
Foreign direct investment: a lead driver or sustainabledevelopment(Towards earth summit 2002 economic serial number 1)2. EDRC REPORT SERIES NO. 66 “FOREIGN DIRECTINVESTMENT IN PAKISTAN:POLICY ISSUES AND OPERATIONAL IMPLICATIONS”Ashfaque H. Khan and Yun-Hwan Kim July 1999 Ashfaque H. Khan isEconomiAdvisor to the Minister of Finance, Government of Pakistan, and Yun-HwanKim is Senior Economist at the Asian Development Bank.
Asian Development Bank P.O. Box 789 80 ManilaPhilippines©1999 by Asian Development Bank July 1999 ISSN 0117-0511 3 Bi-Directional Causality between FDI & Savings: A Case Study ofPakistan (Muhammad Shahbaz Social Policy and Development Center, Karachi,Pakistan Rehmat Ullah Awan AssistantProfessor, Department Of Economics University Of Sargodha, Sargodha, Pakistan E-mail: [email protected] Liaqat Ali Mohammad Ali Jinnah University,Karachi, Pakistan)4 Economic evaluation of foreign directinvestment in Pakistan(MAHRMUHAMMAD YOUSAF, ZAKIR HUSSAIN and NISAR AHMAD) 5 Afzal, M. (2004), Estimating long runtrade elasticities in Pakistan:A Cointegration approach.
The Pakistan Development Review, Volume43, and No. 4. 6 Alfaro et al. (2006), how does ForeignDirect Investment promote economic growth? Exploring the effects of financialmarkets on linkages, NBER Working Paper 12522, September 2006.
7 Aqeel, Anjum and Nishat Muhammad(2004), the determinants of foreign direct investment in Pakistan, ThePakistan Development Review, Volume 43 and No. 4.