Role of Foreign Direct Investment and Remittances in the Economic Growth of Pakistan

Abstract

Foreign direct investment and remittances play an important role in the economic growth of a country by bringing the latest technology, promising better infrastructure, providing foreign capital and generating employment opportunities. The policy environment, macroeconomic stability, a sound domestic financial system, good law and order conditions and the availability of cheap energy and skilled manpower are all assumed to be some of the important preconditions for foreign direct investment. Remittances, being a reliable alternate source of capital, serve the country well in distressed economic situations. The present study is designed to explore the role of foreign direct investment and remittances on the economic growth of Pakistan by using the Engle Granger Cointegration method. Empirical results suggest that there is a long run relationship between the dependent and independent variables included in the model. Remittances and gross fixed capital formation variables have a positive impact on economic growth in the long-run. However, foreign direct investment has a negative effect on the growth because prerequisites are missing in Pakistan. Result suggests that there is disequilibrium among the variables in the short-run. The disequilibrium that occurs in the previous time period is very rapidly adjusted in the current time period. Improving conditions for attracting foreign direct investment could further increase economic growth in the country.