Measuring the Effect of Various Determinants of Direct Investment in Pakistan

Abstract

The share of foreign direct investment (FDI) flowing in the country is negligible when compared to the opportunities and economic fundamentals of the country. Therefore, the basic motive of the study is to investigate the determinants of FDI flow to Pakistan. The study explores the main determinants of FDI in Pakistan with a particular emphasis on Economic and Political factors. Six important economic and political determinants are highlighted in the theoretical framework. These are market size, interest rate, inflation, trade policies, government stability, and government policies (other than trade). Out of these first four are tested empirically (using commercial software package SPSS), while the descriptive analysis of later two is made. The results from correlation and regression analysis suggests that over a period of decade FDI inflow in the country is affected significantly due to the market size and trade policies. Government stability, policies consistency, taxation and tariff policies and law and order situations also considered to be the important factors affecting FDI in Pakistan. The prospects of FDI in Pakistan have improved in last three-four years. The factors which are favoring FDI are higher economic growth, macroeconomic stability, reforms, consistent policies and the political and law & order situations.