(2010-2016) Submitted to: Sir Hidayat Ali Khan Submitted by: Muhammad Nouman Misbah Shahzad Foreign Direct Investment and economic growth in PAKISTAN Abstract The aim of this study is toinvestigate the impact of foreign direct invest in economic growth of PAKITSAN.
It also covers the benefits and consequences arise from the foreign directinvestment. Foreign direct investment refers to the investment in a business ofa one country by an entity based in another country. However it is differentfrom the portfolio and domestic investment .A foreign direct investment is amajor source of external funding and plays an important role in the economicdevelopment of the country. Direct foreign investment has positive impact oncountry gross domestic product (GDP), capital formation, employmentopportunities, better business relations with countries and many advantagesrelating to import and export. However it leads some negative impact such ashigh completion to home market products or monopoly etc.
This research articleis typically related to the impact of DFI on economic growth and GDP in PAKISTAN forthe period 2010-2016. Introduction Aforeign direct investment plays an important role in order to boost the economyof developing countries such a PAKISTAN.This is considered an important factor in the development of the country’seconomic growth.
Foreign direct investment is an inflow of foreign countrieswhich not only fulfill the requirements of capital but also leads to differentadvantages such reduction in cost, increasing foreign reserves, favorablebalance of payment, increasing domestic investment etc.Like other developingcountries Pakistan is also considered as a favorable country for DFI because ofhuge population, favorable economic condition, Government polices, environmentand low running cost. In last few decades many countries are attracted towardthe Pakistanfor investment. The biggest example of investment in from foreign country isCPEC and other related projects.
This study typically analyzes the effect offoreign direct investment on GDP and economic growth. Foreign direct investment isalso serving as a means for movement or transfer of information and technology. The basic motives of direct foreigninvestment from investor point are effective market, resources and profits. Pakistan as adeveloping country can fulfill these motives and seems a good option for directforeign investment. Now question is that, how direct foreign investment affectsthe GDP of country? Gross domestic product is monetary measures of all finalgoods and services produced or rendered during the period of time. So whenthere is a foreign direct investment in a country it will leads to higherproduction and effective utilization of resources which ultimately leads tohigh per capita income which means high GDP. According to wikipedia Pakistanis considered 5th populated country with the population of 209,970,000 people and has GDP 283.
7 billionUSD (2016). There are some factors in Pakistanthat hinder the opportunities of foreign investment such as Governmentpolicies, terrorism and political uncertainty. In order to make your country agood option for foreign investment Government should intervene to remove suchdifficulties and problems. There may be a chance that direct foreign investmentmay offer country domestic product a high competition and hold monopoly or mayspoil other domestic investors and business men. Literature review Foreign DirectInvestment (FDI) is determined by three sets of advantages which directinvestment should have over the other institutional mechanisms available for afirm in satisfying the needs of its customers at home and abroad. The first ofthe advantages is the ownership specific one which includes the advantage thatthe firm has over its rivals in terms of its brand name, patent or knowledge oftechnology and marketing.
This allows firms to compete with the other firms inthe markets it serves regardless of the disadvantages of being foreign. Thesecond is the internationalization advantage that is why a ‘bundled’ FDIapproach is preferred to ‘unbundled’ product licensing, capital lending ortechnical assistance (Wheeler and Mody, 1992). Falki (2009)conducted a study on the impact that FDI had on the economic development of Pakistan. Thestudy included data on FDI gathered from the Handbook of Pakistan economy of2005.
Data ranged from 1980 and 2006 and held variables such as domesticvariables, labor force and foreign invested capital. Falki used the endogenoustheory of growth and a regression analysis, Falki was able to conclude that FDIhad a statistically negative effect on the gross domestic product and foreigndirect investment in the country. Similarly, Agarwal (2000) in his study foundthat the increase of FDI in South Asian countries was in association with theexponential investment by local investors, providing evidence to belief thatthe relationship between FDI and GDP and the influence of FDI on GDP wasnegative till the year 1980. In the following years, early 80s, the link wasmildly positive and strengthened over the years in the late eighties into thenineties.
In contrast, Adam& Tweneboah (2009), economists from Ghana,conducted an independent study on the FDI and stock market development in thecountry concludes that FDI in Ghanahad a positive impact on the development of the economy and the stock market. Theexamination included data of market capitalization as a proportion of the LocalGDP and Ghanacedi and Dollar exchange and the net FDI influx of the quartersbetween the years 1991 to 2006. With the use of multivariate co-integrationanalysis and the Vector Error Correction Model., the study revealed that therelationship between FDI and the Ghanaian stock market will be beneficial inthe long run for the country.