Does Chinese Foreign Direct Investment (FDI) Stimulate Economic Growth in Pakistan? An Application of the Autoregressive Distributed Lag (ARDL Bounds) Testing Approach

Abstract

The objective of this paper is to ascertain the impact of Chinese FDI on economic growth in Pakistan. This study documents the exploration of the determinants of economic growth in Pakistan by emphasizing the significant role played by Chinese FDI and investments in renewable energy in particular. This paper employs time series data analysis to examine the relationship between GDP and Chinese FDI, inflation, trade openness, exchange rates, interest rates, remittances, and renewable energy consumption from 1990 to 2019. The study involved performing the ARDL bounds test, and it was determined that the dependent and independent variables are linked in the long term. Furthermore, the error correction model is negative and noteworthy, which checks the long-run relationship between variables. According to the findings of the autoregressive distributed lag (ARDL) model, Chinese FDI has a substantial favorable effect on Pakistan’s economic growth. Furthermore, renewable energy usage has a long-term favorable and significant association with Pakistan’s economic growth. This study established that FDI, and particularly renewable energy, will stimulate the economic growth of Pakistan. Our research has substantial policy implications, especially when it comes to the relationship between FDI and renewable energy.

Foreign Direct Investment (FDI), Abundance of Natural Resources, and Economic Growth

“…In addition, FDI can help boost exports by expanding the capacity and competitiveness of domestic production. This result is consistent with the findings of multiple studies (Mehic et al, 2013;Alvarado et al, 2017;Hayat, 2017;Sultanuzzaman et al, 2018;Dinh et al, 2019; http://journal.uinjkt.ac.id/index.php/signifikan https://doi.org/10.15408/sjie.v12i1.29975 Shittu et al, 2020;Zeeshan et al, 2020;Mohamed et al, 2021;Nasir et al, 2021;Orji et al, 2021;Ahmad et al, 2022), which have found that an increase in FDI inflows can stimulate economic growth. In addition, Raza et al (2021) discovered that countries with high institutional quality tend to have stronger economic growth and more foreign direct investment (FDI) inflows.…”

“…Orji et al (2021) found that FDI can increase economic growth, and therefore governments should aim at attracting FDI in all sectors, particularly the industrial and service sectors. This result is supported by the findings of Ahmad et al (2022), who observed that FDI could drive economic growth. Gochero & Boopen (2020) found that FDI in the mining sector can increase economic growth in both the short and long terms.…”

An empirical study of the relationship between Foreign Direct Investments, Remittances, Political Stability and Economic Growth in Greece

“…To proceed, a VECM(2) is performed, which according to the inverse root of AR characteristic polynomial indicates satisfies the stability condition. 7 The Akaike Information Criterion (AIC) and the Final Prediction Error (FPE) also suggest a length of 2, and this is important for the lag specification, since the AIC and the FPE have been proven to be superior to any other criteria in case of small samples -60 observations and below-(Liew, 2004), such as in our case. This is because they minimize the possibility of the underestimation, while they maximize the chance of obtaining the true lag length (Liew, 2004).…”

“…A lag length of 2 is selected, as supported by the majority of the criteria. 7 For the sample period 1980-2018, the Johansen cointegration test supports three cointegrating equations between the variables at 5% level of significance using the Trace test, and two cointegrating equations at 5% level of significance using the max-Eigenvalue test. 8…”

“…It is generally supported that Foreign Direct Investment (FDI), which is a type of an investment made by a company or an individual from one country in business interests located in a host country, play a considerable role in the second country's economy. FDI increases the stock of physical capital, which in turn leads to the development of human capital, and therefore, upgrades the economic stability and boosts the economic growth of the recipient country [1]; [2]; [3]; [4]; [5]; [6]; [7]; [8]. On this context, it has been pointed out that highly productive sources are entered into the recipient country due to FDI, which entails an increase in employment opportunities [9]; [10]; [11].…”