THE DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN PAKISTAN

Abstract

Purpose- The main purpose of conducting this research is to find out the determinants of FDI in Pakistan for the period 1994-2013 by using linear regression model and least square method and also to propose suitable policy measures for addressing those factors and pulling the inflows back on the track to increase. Methodology/sample- This is a quantitative, explanatory research that relies on the secondary data. The data which is utilized in this study is time series secondary data on behalf of the period as of 1994 to 2013. The data has been taken from the annual reports of State Bank of Pakistan, Economic Surveys of Pakistan, Hand book of statistics on Pakistan economy 2005, Federal Bureau of Statistics volumes, SBP website, articles and research journals etc. FDI inflow in Pakistan is taken as dependent variable. Market size (MKTZ), Indirect taxes (TAXES), Infrastructure facilities (TPT), Inflation Rate (INFLR) and External debt (DEBT) are taken as independent variables. For empirical estimation stationary test, ordinary least square (OLS) method, J J co integration test, Error correction model and Log linear regression model was used. As log linear regression model was used due to non-linearity of the data. Statistical software Eviews was used for deriving the outcome. Findings- This research study consider the market size (MKTZ), Inflation rate (INFLR), Infrastructure facilities (TPT), indirect taxes (TAXES) and external debt (DEBT).All variables are found significant. FDI, market size, indirect taxes, inflation rate and external debt series are stationary series at first difference at 1%, 10% and 5% significant level. Whereas, infrastructure facilities is a non-stationary series at 1%, 10% and 5% significant level. Market size and Inflation rate shows positive and significant correlation with the FDI inflows. Whereas, Infrastructure facilities, indirect taxes and external Debt shows negative and significant correlation with FDI inflows. This shows that if we increase any of these variables, a decrease in the FDI inflow can be expected. Long run co-integration exists among FDI, Market size, Indirect taxes, infrastructure facilities at 5% significance level because the value of the trace statistic and Max-Eigen Statistic was above its critical value at the 5% significance level. Market Size has positive and significant relationship with FDI inflows in short run at 5% level of significance. Whereas Indirect taxes and infrastructure facilities have negative and significant relationship with FDI inflows in short run at 5% level of significance. Practical Implications- This research study would help foreign (MNCs) investors for making decision concerning creating investment in Pakistan. This research study also suggests several practical policy measures to be adopted in order to put FD1 inflows back on the track to increment, if duly implemented. In order to attract more FDI in Pakistan Government should provide stable political and economic environment, moderate or maintain inflation rate, minimize external debt ,remove restrictions and barriers on exports and imports, reduce the tax burden and interest rate on foreign investor, promote well establish infrastructure, provide fiscal and financial incentives and maintain consistency in government policy.