Major determinants of foreign direct investment in Pakistan

Abstract

Foreign Direct Investment (FDI) has been one of the most fascinating and intriguing topics amongst researchers in international business. It is one significant form of rapid international expansion to increase ownership of assets, derive location-specific advantages and acquire additional knowledge. Emerging markets possess a lot for potential for Foreign Direct Investment (FDI). These markets enable investors to increase their profitability at a cost lower as compared to other markets. During the last two decades and specifically during the last eight to ten years Pakistan has undergone certain economic and policy changes which have enabled it to develop itself as a promising host nation for foreign investors. Efforts have been made not only to enhance economic growth but also to develop proper infrastructure, enhance the human resource availability, reduce factor cost and amendment of policies in order to render Pakistan as an investment friendly country. The prospects of FDI in Pakistan have specifically improved over the past decade. The factors which are favoring FDI are higher economic growth, macroeconomic stability, reforms, consistent policies and the political and law & order situations. The study explores the main determinants of FDI in Pakistan with a particular emphasis on Economic factors and Investment Policy. Five important economic determinants along with a political determinant have been highlighted. These determinants have been stressed upon in coherence to previously conducted studies. The main determinants analyzed in the study are GDP, interest rate, inflation, labor force availability, exchange rate and liberal investment policy. The economic determinants have been empirically tested in order to identify the relationship between these variables and FDI inflow in Pakistan, where as descriptive analysis has been carried out to signify the relationship between FDI and a liberal investment policy.