Foreign Direct Investment - Exports Nexus in Pakistan: A Time Series Analysis

Abstract

This study aims at analyzing the relationship between FDI and export for the economy of Pakistan. Data used ranges from 1976 to 2012. In order to investigate time series property of data, ADF test was used. Besides, Engle and Granger (1987) residual based test, the Trace test and the Maximum Eigen value test, Hendry’s Error correction model, Granger Causality Analysis, CUSUM and CUSUM of square test and Chow Break point test have been used. Results reveal the significant positive effect of FDI on export in the long run as well as in short run. Stability analysis suggests that estimates of long run relationship are stable in selected sample. On the basis of the findings, it is suggested that government should promote the FDI by providing trade benefits and tax exemptions so that the economy can boost and foreign investors are attracted to enhance export performance of Pakistan.