Impact of Foreign Direct Investment on Small and Medium Scale Enterprises in Pakistan

Abstract

This study attempts to analyze the impact of foreign direct investment on the small and medium scale enterprises in Pakistan by using the annual time series data from period of 1982 to 2019. ADF unit root test, ARDL model and granger causality test are used to analyze the data. The outcomes of long-run ARDL model exhibits that foreign direct investment, gross savings, exports of goods and services positively enhance the performance of small and medium scale enterprises in Pakistan. In Granger causality analysis, it is found that there is a unidirectional causality between SME growth rate and foreign direct investment. The unidirectional causality is also observed between gross savings and SME growth rate. It is therefore suggested that an appropriate environment to the foreign investors may be provided to bring foreign direct investment inflows in a country. Government of Pakistan may improve the infrastructure in a country to increase FDI inflows.