The determinants of foreign direct investment in Pakistan

Abstract

The paper empirically identifies the determinants of growth in foreign direct investment (FDI) in Pakistan over the period 1961 to 2003. Our main interest is to study how different variables or indicators reflecting the trade, fiscal, and financial sector liberalisation attract FDI in Pakistan. The study uses the cointegration and error-correction techniques to identify the variables in explaining the FDI in Pakistan. The study considers the tariff rate, exchange rate, tax rate, credit to private sector, and index of general share price variables to see if they explain the inflow of foreign direct investment. Also included are wages and per capita GDP to test for relative demand for labour and market size hypotheses. All variables indicate correct signs and are statistically significant except for wage rate and share price index. The study clearly emphasises the role of these policy variables in attracting FDI and determining its growth in both short- and long-run in Pakistan, and also indicates a positive and significant impact of reforms on FDI in Pakistan.