Estimating the key determinants of foreign direct investment flows in Pakistan: new insights into the co-integration relationship

Abstract

PurposeThis empirical analysis tries to examine determinants of private foreign direct investment (FDI) in Pakistan using the bounds test approach. Main determinants of FDI among them are the size of the market (Q) macroeconomic stability (r), political stability (PRS), real exchange rate (REX) and institutional quality (INQ).Design/methodology/approachThis study used annual time-series data set starting from 1980 to 2016. This study has used time-series data with ARDL and error-correction model (ECM) and examined main determinants of FDI for Pakistan. The study used the Granger causality test (modified WALD test) to identify the causality among the variables.FindingsMoreover, empirical findings indicate the long-run relationship between GDP, trade openness and institutional quality toward FDI. However, political instability, inflation and real exchange rate harm FDI in Pakistan. Furthermore, results of Granger causality indicate that the bidirectional causality running from FDI and Q toward FDI is significant, providing evidence of FDI-led growth hypotheses in Pakistan. This study determines the correlation between FDI and Q (GDP growth) related to the “feedback hypothesis” in the short and long run. This study also concludes that the short-run causal connection among FDI, REX, PRS, r and Q follows the “feedback hypothesis.” This describes that FDI, REX, PRS, r and Q variables are jointly determined and affected together.Originality/valueThis study also explores the causal association between FDI and its significant determinants, by using methods of Granger causality test and the approach of Toda-Yamamoto-DoladoLutkephol (TYDL) to examine the causal relationship and its directions among these variables.

Determinants of Foreign Direct Investment in Indonesia

“…According to [25], the findings suggest that the exchange rate volatility has a significant impact in the case of Southeast Asian countries without a floating exchange rate regime. This finding is contradictive to [27] which stated that real exchange rate harms the foreign direct investment in Pakistan. In accordance with that finding, [29] stated that over time, the appreciation of a local currency has a significant negative impact on Malaysia's inward flow of FDI.…”

“…A good market size will attract more investors to directly invest, and a bad market size will motivate investors to do the opposite. [27] stated that there is a long-run relationship between GDP (market size) and the foreign direct investment in Pakistan.…”

Does higher population matter for labour market? Evidence from rapid migration in Canada

“…However, these results are not significant. These results mean that at the local level, the influx of immigrants in the labour market does not have a significant effect on the income levels of the natives (Saleem, Shabbir, Khan, Aziz, et al, 2020). We also find the results on the impact of immigration on the native employment rate to be significant.…”

Selection of Variables in Data Envelopment Analysis for Evaluation of Stock Performance

“…He recommends portfolio with 100% efficient stock for conservative investment. Similarly, cost of goods, total revenue, average asset, sales cost, revenues, operating profit and net income were used in the evaluation of stock performance (Chen, 2008; Garkaz & Pesarakloo, 2011; Saleem et al, 2020; Shabbir, 2016). Abad et al (2004) attempted to link the causal effect of a firm’s current financial data to its future earnings and to its value.…”

“…In addition to the above-mentioned ratios Hwang et al (2007) used owners’ equity to fixed assets, times interest earned and achieved a 100% hit rate in classification of stocks for investors used by employing DEA data analysis (DA) approach. Ling and Kamil (2010) used two sets of variables—one with the absolute values (total assets, current assets, current liabilities and total expenses as inputs and net income after taxes and revenue as outputs) from financial statements and the other set with ratios (current ratio, debt ratio and debt to equity as inputs and return on investment, return on equity and earnings per share as outputs) in evaluating stocks (Nguyen et al, 2020). These factors were screened by using correlation analysis.…”