Foreign Direct Investment
Investment (FDI) is commonly known as a cross-border investment which is made
by an investor with a view to establishing a lasting financial interest in an
industry/enterprise and trying to exert a degree of influence on the operation
of the enterpriser and where the foreign investor holds an interest of at least
10% in equity capital. FDI is often mentioned as a lead driver for economic
growth and thought to bring certain benefits to national economies. It can
contribute to Gross Domestic Product (GDP), Gross Fixed Capital Formation
(total investment in a host economy) and balance of payments.
In the past,
very few studies have dealt in determining the interactions between foreign
direct investment (FDI) and the economic development of the home country (Pakistan).
It is for this purpose that this study will explain the interaction between FDI
and the home country’s economy/economic development. In this study, the focus
will be on determining the impact of foreign direct investment in the Pakistan’s
Economy. This study also attempts to determine how foreign direct investment
has been able to enhance the performance of the Economy of Pakistan, which is
commonly known as one of underdeveloped economy in the world.
This study will attempt to identify how
foreign direct investment affects the economy of Pakistan. Basically, this
study aims to study the economy of Pakistan by reviewing related
articles, papers and conducting survey to knowledgeable individuals such as
economists, businessmen and other business personalities. The primary objective
of this study is to examine and determine the perception of economists,
businessmen and other business personalities regarding the (Positive or
Negative) impact of foreign direct investment on the economy of Pakistan.
To address this objective, I will explore the nature of economy and foreign
direct investment in PAKISTAN:
its benefits and advantages to the country.
of 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,
a survey is conducted to the economists, investors, businessmen and other
business personalities to determine what attributes affect the economy of Pakistan.
Finally, this research aims to come up with pertinent findings, and provides
insightful recommendations for the progress of Pakistan economy.
This study will attempt to answer the following questions:
What are the related factors within
foreign direct investment affecting the economy of Pakistan?
What are the advantages of foreign
direct investment to the economy of Pakistan?
What is the perception of the
respondents regarding foreign direct investment?
Stimulation of national economy
FDI is thought to bring certain benefits to national
economies. It can contribute to Gross Domestic Product (GDP), Gross Fixed
Capital Formation (total investment in a host economy) and balance of payments.
There have been empirical studies indicating a positive link between higher GDP
and 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 has
dropped. FDI can also contribute toward debt servicing repayments, stimulate
export markets and produce foreign exchange revenue. Subsidiaries of
Trans-National Corporations (T Stimulation of national
economy FDI is thought to bring certain benefits to national economies. It can
contribute to Gross Domestic Product (GDP),
Gross Fixed Capital Formation (total investment in a
host economy) and balance of payments. There have been empirical
Studies indicating a positive link between higher GDP
and 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 has
also contribute toward debt servicing repayments, stimulate export markets and
produce 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 given
shortly. In view of these determinants, the fundamental requirement that
governs foreign investment in Pakistan
revolves around ten main factors, which could be called the ten checkpoints.
These are political stability; law and order; economic strength; government
economic policies; government bureaucracy; local business environment;
infrastructure; quality of labor force; quality of life; and welcoming attitude
(see Shirouzu 1993).
What was the impact on Pakistan’s imports and exports?
First, most empirical research suggests that inflow of FDI tends to increase
the host country’s imports. One reason is that MNCs often have a high
propensity to import intermediate inputs, capital goods, and services that are
not readily available in the host countries.24 Some studies indicate that the
impact of FDI inflow on a host country’s imports is either nil or that it
slightly reduces the level of imports (Hill 1990). If FDI is concentrated in
import substitution industries, then it is expected to affect imports
negatively 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 and
Schmidt (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 (Fry
1996). In order to examine the impact of FDI on Pakistan’s imports, we tested an
import demand function.25 Results suggest that the inflow of FDI increases
imports with a lag of one year. The coefficient is statistically significant
with a positive sign and suggests that a 10% increase in the inflow of FDI
increases imports by 1.8 percent. Income elasticity of import demand is less
than unity (0.8) indicating that a 10% increase in real GDP increases imports
by 8 percent.
Causality between FDI & Savings: A Case Study of Pakistan:
The positive impact of FDI on economic growth has been empirically
proved for small developing economy like Pakistan. It is revealed in
economic literature that causal association between said variables is mixed due
to heterogeneity among economies, diverse nature of long and short run impacts
and 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 by
Chang, (1995) and supported the fact that FDI improves levels of domestic
savings rather than decreasing. Similarly, Bashier and Bataineh (2007)
investigated relationship between FDI & savings and found combination in
long span of time between said actors. Furthermore it is concluded that FDI is
complementary for national savings in the case of Jordan. FDI plays a positive
developmental role as mentioned by Chen (1992). Especially in the host
countries FDI creates a positive effect on economic growth like Pakistan
because it comprises of certain very important factors like capital, technology
management, and market access (Shahbaz, et al., (2007).
evaluation of foreign direct investment in Pakistan
(MAHR MUHAMMAD YOUSAF, ZAKIR HUSSAIN
and NISAR AHMAD)
Foreign Direct Investment (FDI) in Pakistan is one of the major
external sources of funding to meet obligations of resources gap and goal
achievement. FDI has played a vital role in the economic growth of Pakistan. FDI
contributed significantly in the human resources development, capital
formation, and organizational and managerial skills of the people in the
country. Total foreign investment was $ 6.0 billion, of which FDI amounted to $
4.16 billion in the year 2007. The present research study empirically analyzed
the 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 data
series used in the analysis. Cointegration technique was used to analyze the
long run relationship among the variables. Error Correction Model was used for
The results of the import model showed that FDI positively
impacted real demand for imports in the short run and in the long run. In case
of one percent increase in FDI; real demand for import would increase by 0.08
percent in the short-run and 0.52 in the long run. The results of export model
showed that FDI has negative relation with real exports in the short-run and positive
relation in the long run. The export model estimations indicated that with one
percent increase in FDI, real export decreased by –0.08 percent in the
short-run and increased by 1.62 percent in the long run.
The study intends to identify the impact
of foreign direct investment in the economy of Pakistan. For this study, primary research and secondary research will be
used. Primary research will be conducted using the data that comes from the
chosen respondents. The data about the respondents’ perception regarding
foreign direct investment and economic growth of Pakistan will then be presented.
Further, primary research is conducted using questionnaire surveys
that will be sent to the respondents. Here, the questionnaires will be used to
collect quantitative data and the interviews will be used to provide
qualitative insights into the data collected.
This study will also employ qualitative research method. Through
this method, qualitative elements that do not have standard measures such as behavior,
attitudes, opinions, and beliefs about FDI will be analyzed.
For this study, I will gather data, collect published
studies and articles from related journals; and make a content analysis of the
collected documentary and verbal material related to the topic as well as the
overall definition and perception about foreign direct investment and economic
Afterwards, I will
summarize all the information; make a conclusion from the gathered data and
then recommendations will be provide.
Survey/ Questionnaire Structure:
In this study I will design a questionnaire
for the survey. The primary aim of the questionnaire is to determine the effect
of foreign direct investment on the economy of Pakistan. This study will use a mixture
of closed questions and open comments in the questionnaire.
question is one that has pre-coded answers. The simplest is the
dichotomous question to which the respondent must answer yes or no. Through
closed questions, I will be able to limit responses that are within the scope
of this study. Thus I will design a closed question type to remain focused on
the statement of the problem and on the main purpose of the study.
In addition, closed questions will
be used in the survey because the answers are easy to analyse and are
straightforward, as target respondents are mostly busy that they do not have
enough time to give attention to open questions. Closed response
questions save the respondent time.
In this study I
will select limited number of respondents. The respondents may include
economists, businessmen, other business personalities and those people have
knowledge of the concern topic.
I will prepare a questionnaire and also
guide questions for the interview that will be asked to the intended
respondents. The data collection instrument will be a structured questionnaire
that will be designed and based on Likert scale. A Likert Scale is a
rating scale that requires the subject to indicate his or her degree of
agreement or disagreement with a statement and the respondent will choose one
from the given five response choices.
of the Instrument
Moreover, structured interview will be used in
this research study. Structured interview is a kind of interview that
promotes a question and answer process. It is composed of detailed explicit
questions. These questions will be asked from interviewee to clarify the
unclear statements about FDI and its role in economy. All the process will be
remain objective rather than subjective (there will be no personal like or
Cost and Time
The outcome of
this study will be limited only to the information gathered from books,
internet and journals and from the primary data gathered from the result of the
questionnaire survey and interview and the survey will be conducted only in Peshawar and Nowshera. As
the research was completed in a relatively short period of time other factors
and variables are not considered. This might have an impact on the results of
resources are also constraint that I can’t make long survey and the second
major reason is the bad condition of Pakistan now days.
1. Foreign direct investment: a lead driver or sustainable
development(Towards earth summit 2002 economic serial number 1)
2. EDRC REPORT SERIES NO. 66
INVESTMENT IN PAKISTAN:
POLICY ISSUES AND OPERATIONAL IMPLICATIONS”
Ashfaque H. Khan and Yun-Hwan Kim July 1999 Ashfaque H. Khan is
EconomiAdvisor to the Minister of Finance, Government of Pakistan, and Yun-Hwan
Kim is Senior Economist at the Asian Development Bank. Asian Development Bank P.O. Box 789 80 Manila
©1999 by Asian Development Bank July 1999 ISSN 0117-0511
Bi-Directional Causality between FDI & Savings: A Case Study of
Pakistan (Muhammad Shahbaz Social Policy and Development Center, Karachi,
Pakistan Rehmat Ullah Awan Assistant
Professor, Department Of Economics
University Of Sargodha, Sargodha, Pakistan E-mail: [email protected] Liaqat Ali Mohammad Ali Jinnah University,
Economic evaluation of foreign direct
investment in Pakistan
MUHAMMAD YOUSAF, ZAKIR HUSSAIN and NISAR AHMAD)
Afzal, M. (2004), Estimating long run
trade elasticities in Pakistan:
Cointegration approach. The Pakistan Development Review, Volume
and No. 4.
Alfaro et al. (2006), how does Foreign
Direct Investment promote economic growth? Exploring the effects of financial
markets on linkages, NBER Working Paper 12522, September 2006.
Aqeel, Anjum and Nishat Muhammad
(2004), the determinants of foreign direct investment in Pakistan, The
Pakistan Development Review, Volume 43 and No. 4.