Impact of Tariff Structures on FDI in Pakistan

Abstract

The purpose of present study is to construct a relationship between tariff structures and FDI to identify and measure how and to what extent tariff structures of a country influences the FDI in today's era of increased capital mobility. On the basis of the review of literature the study took tariff structure as independent variable to measure its effect on FDI being dependant variable. Gross capital formation, inflation and GDP are taken as control variables affecting FDI in relation to changes in tariff structures. Time series secondary data regarding the studied variables covering the period 1973-2011 is taken for conducting the analysis. Data analysis for the present study is conducted through Augmented Dickey Fuller Test (ADF) for data stationarity; Johansen Cointegration Test for data cointegration; and Least Square Regression Analysis for measuring the impact of explanatory variables on dependant variable. The study concludes that lower tariff structures, higher GDP and higher inflation increase the foreign direct investment whereas gross capital formation has no effect on the foreign direct investment. The study recommends that tariff structures should be framed out in a way to provide maximum tax incentives to foreign investors in order to promote FDI into the country. Moreover there is a defiant need of stabilizing the political, social and economic systems as well along with the decreasing of tariff structures to improve the FDI. The study is of crucial significance for a country like Pakistan; to attract more FDI through framing out reasonable tariff structures; for the stability and growth of the economy of the country.