Foreign direct investment, exports, and domestic output in Pakistan

Abstract

Most empirical work on the effects of outward-oriented policies in developing countries has identified openness with trade. However, openness involves much more than just trade. This paper analyses the relationship between foreign direct investment, trade, and domestic output by employing the Granger non-causality, recently developed by Toda and Yamamoto, over the period 1972 to 2001. The results show the long-run relationship among the variables. The results support the export-led growth hypothesis. The finding indicates the FDI-domestic output nexus. This suggests that domestic firms, through the spillover effect mechanism, have benefitted from FDI. The findings do not show the FDI-export growth nexus. The results indicate that the integration of Pakistan economy with the world economy should be enhanced with such policies as will attract more FDI in order to gain the spillover effects of FDI for output, and particularly for FDI-led export growth.