Testing the Relationship Among Macroeconomic Variables and Foreign Direct Investment Inflows in Pakistan

Abstract

Foreign direct investment is considered to be an important factor in economic growth of a country and in most of the developing countries such as Pakistan, FDI inflows is seen as vital catalyst for its development. It improves the economic growth of a country by simulating native investment, facilitating technology transfers in recipient country and increasing human capital development. This study is analyzed to check the impact and relationship of selective macroeconomic variables such as terrorism, inflation rate, market size, interest rate, democracy, and trade openness on foreign direct investment in Pakistan for the period of 1980 to 2013 through ARDL approach. The major findings of this study show that inflation rate, interest rates, democratic GOVT regimes and terrorism attacks are affecting the FDI inflows in Pakistan and all has long run association with FDI, whereas in short run inflation, interest rates and terrorism attacks show negative and market size show positive relationship with FDI inflows in Pakistan. Furthermore, trade openness has no impact on FDI in both long run and short run and is insignificant. The findings of this study suggest that increased interest rates and inflation rates in Pakistan will cause lower FDI inflows. The gross domestic product as market size increases it has positive impact on FDI inflows in Pakistan. The terrorisms attacks are major problem for Pakistan's economy. The results show that previous terrorism attacks are affecting FDI inflows negatively in the short time span, but in long run it becomes positive. It means Pakistan economy has capacity to cover its problems and not much suffers from such attacks.