Thesis of Aitzaz Ahsan

8/13/2019 Thesis of Aitzaz Ahsan

1/63

Superior Group of Colleges, Lahore Page 0

The determinants of the Foreign Direct InvestmentIn Pakistan

A Thesis Submitted to the

Superior University

In Partial Fulfillment of the Requirements for the Degree of

Masters in business administration

By

Aitizaz Ahsan

MBP-11027

Year

2012


2/63


Declaration of Originality

I hereby declare that this project is entirely my own work and that any additional sources of

information have been duly cited.

I hereby declare that any Internet sources published or unpublished works from which I have

quoted or draw references fully in the text and in the content list. I understand that failure to do

this will result in failure of this project due to plagiarism.

I understand I may be called for viva and if so must attend. I acknowledge that this is my

responsibility to check whether I am required to attend and that I will be available during the

viva periods.

Signed

Date.

Name of Supervisor


3/63


Abstract:

This study is about the about the determinants of Foreign direct investment in Pakistan. For this

purpose, I collect the data from world development indicator and collect pervious 25 years data.

After getting the data, put in the SPSS software and apply different tests, through these tests get

the significant results. The variables, real exchange rate, real interest rate and GDP growth are

discussed in detail.


4/63


Acknowledgement:

We are deeply indebted to Almighty ALLAH who gave us the strength and knowledge to

complete this research. Although nothing is perfect in this fascinating world, yet we have tried

our best to make this project. We are grateful to our respectable teacher MADAM KHANSA

IREM who impacted us all knowledge required to complete this research. We pay full

appreciation and thanks to our friends and our teachers who encouraged us throughout in our

work.


5/63


Acronyms:

FDI: Foreign direct investment

IR: interest rate

GDP: Domestic growth production

GNP: Gross national production


6/63


Table of Contents

Declaration of Originality .................................................................................. I

Abstract ................................................................................................................ II

Acknowledgment ................................................................................................. III

Acronyms ..................................................................................... IV

Chapter 1: Introduction . 7

1.0 introduction. 71.1 purpose statement ... 12

1.2 objectives ... 12

1.3 significance 12

1.4 research questions .. 13

1.5 key term definition.. 14

Chapter 2: Literature Review .... 15

2.0Theoretical Model ... 34

Chapter 3: Data/ Methodology ......... 35

3.0Paradigm ......................... 35

3.1D ata collection. 35

3.3 M ethodology .. 43

Chapter 4: Analysis ............. 37

4.1 D escriptive summary . 37

4.2 H istogram ..... ..... 48


7/63


4.3Scatter plot . 42

4.4C orrelation . 48

4.5R egression .. 54

Chapter 5: Discussion/ conclusion ......... 54

5.0 Discussion .. 56

5.1Conclusion .. 57

References ... 58


8/63


Chapter # 1

Introduction

1.1 Introduction:

In developing countries foreign direct investment (FDI) has been widely recognized as a growth-

enhancing factor. FDI can promote economic growth, in the host country through a variety of

channels. Technology transfer and spillovers is the most important being. In economic

development economic growth has established the importance of technological progress. In the

host countries FDI leads to technology transfer to affiliates of multinational firms. Domestic

suppliers, customers and worker mobility through this spillover can occur the interaction of

multinational firms. As a source of external finance most of the developing countries rely on FDI

because FDI stimulates economic growth more than other sources of capital inflows. To offer

financial resources, transfer of modern technology, market access and managerial knowhow FDI

is supposed to be less impulsive. By increasing fixed investment in the host countries financial

resources are largely used to expand productive capacity, managerial know-how and transfer of

technology improves productive capacity. Sales and procurement networks FDI brings to the

host countries through they expand their business opportunities. To the local firms FDI increases

competitive pressures that improve technical and allocate efficiency in the host country. (Arshad,

2007)

Foreign direct investments have grown at least twice as rapidly as trade over the last decade. In

the developing countries there is shortage of capital, for their development process they need


9/63


capital, in these countries the marginal productivity of capital is higher. Investors seek high

returns for their capital in the developed world. The international movement of capital is a

mutual benefit.

The world economy and liberalization in many developing countries have led to competition for

inward FDI in these countries. The entry and operations of foreign firms are now being replaced

by selective policies aimed at FDI inflows, like incentives, both fiscal and in kind in these

countries. The selective policies are fundamentals of the economy aim at attracting more foreign

investments in the country.

The government in Pakistan has initiated market-based economic reform policies during early1980s. By providing generous trade and fiscal incentives to foreign investors through number of

tax concessions, credit facilities, and tariff reduction and have also eased foreign exchange

controls the government has gradually liberalized its trade and investment. For FDI the

government further liberalized the policy and opened the sectors of agriculture,

telecommunications, energy and insurance in the 1990s. But the level of FDI remained low

compared to other developing countries due to rapid political changes and inconsistency in

policies. (Aqeel and NISHAT, 2004)

The determinants of FDI inflows are exchange rates to host countries. Positive effect of local

currency depreciation on FDI inflows has generally found. The effect of the exchange rates as a

supply-side or push factor on the FDI inflows is suggested in some studies. Outward FDI

increases stronger home currency. Where the currency is weak FDI goes to those countries as a

given amount of foreign currency can buy more investment. (Morrissey, 2006)


10/63


To attract foreign investment from industrialized countries many developing countries have

designed policies. FDI can be deemed to be a catalyst for output growth, capital accumulation

and technological progress is a less controversial hypothesis. The impact of FDI on growth

provides significant link between foreign direct investment and growth rates.

Growth rates are negatively related to foreign capital stocks but in some other study the same

relationship turns out to be positive. There is significant positive impact of FDI inflows on

growth but according to the level of development of the recipient country such influence is

positive or negative. (Marino,N.d)

FDI is being considered as an important vehicle for economic growth in Pakistan. For local andforeign investors Pakistan has introduced a wide range of incentives and has increasingly tended

to turn to FDI as source of capital, technology, managerial skills and market access needed for

sustained economic development. Foreign investment is fully protected by law; including

avoidance of double taxation the country provides a one-window facility for setting up business.

Reforms and economic achievements in Pakistan during the last few years have steered the

country to a business-friendly environment, creating a win-win situation for both investors and

consumers. By increasing production provide employment opportunities exports goes to boost

and help in modernizing the economy Investment in electronics and other high-tech industries is

widely seen as special desirable in developing countries like Pakistan. (Arshad, 2007)

The cross-border mobilizations of factor resources, in pursuance of transnational production,

constitute modes of international transactions changing the new dimensions for sustained

economic growth. The source of acquisition of managerial control by a business enterprise of a

foreign country over a business activity in a host country is called Foreign Direct Investment.


11/63


The destinations of FDI flows from industrially developed countries to high growth developing

centers are changed by changing perceptions and more attractive policies of the host developing

nations.

The capital fund, advanced production technique, snobbish managerial skills, advertising and

marketing expertise, global links and transfer pricing FDI brings to host country.

With 140 million people Pakistan the worlds 7th most populated country, with a significant

stock of natural resources a relatively high growth rate of GDP and for FDI inflows a variety of

investment provisions has remained unattractive. (Shah and AHMED, 2003)

I examine the some researcher work like The Impact of FDI on Economic Growth under Foreign

Trade Regimes: A Case Study of Pakistan by Ahmed and Azhar, The Determinants of Foreign

Direct Investment in Pakistan: an Empirical Investigation by Shah and Ahmed, Foreign Direct

Investment, Exports, and Domestic Output in Pakistan by Butt and Alam, foreign direct

investment and economy growth the role of domestic financial sector by Khan, foreign direct

investment and its determinants in emerging economies by Wilhelms etc.

Pakistan will have to rely more on attracting private investment inflows to meet its future

requirements of sustained econo mic growth and to retire external debt. Pakistans interest in FDI

is primarily on account of technological know-how, its transference and managerial skills that

accompany such investment. During the second and third five-year plans it was supposed that

foreign investment and skill related to it are more important for capital goods and other

sophisticated industries. Instable political environment along with frequent changes in the ruling

regime indicate inconsistencies in governance and reflecting possible negative effects on


12/63


business activities in the host country. Such uncertainties affect the performance and

sustainability of governmental decisions and contracts. Most of the studies conclude that FDI

flows to developing countries are more susceptible to political atmosphere, as these countries are

perceived to be riskier for investment

The main research deficiencies are that the data is not available completely at WDI. Also the

variables we select in this thesis are not least seen in any research.

This study is important because by this study we examine the factors that affect the FDI inPakistan along with the help of GDP, exchange rate and interest rate. Foreign capital is most

important for developing countries like Pakistan to strengthen its economy and FDI brings a lot

of structure, skills, human resources development tool to the host country.

The main purpose is to determines the factors that affects the growth of FDI in Pakistan


13/63


1.2 Purpose statement

The purpose of this survey study was to test the theory of the determinants of foreign direct

investments in Pakistan that compares the GDP Growth to Foreign direct investment controlling

for exchange rate, interest rate, and in Pakistan. The GDP Growth will be generally defined as

the total market value of all final goods and services produced in a country in a given year, equal

to total consumer, investment and government spending, plus the value of export, minus the

value of imports, and to the control and intervening variable (s), like FDI, exchange rate and

interest rate will be statistically controlled in the study.

1.3 objectives

Overall objective is to evaluate the determinants of foreign direct investment in Pakistan

But there are some sub-objectives to support the above objective

To determines the impact of GDP Growth on FDI

To examines the impact of Exchange rate on FDI

To determines the impact of Interest rate on FDI

1.4 significance of the study:

FDI has remained the largest form of capital flow in the developing countries far surpassing

portfolio equity investment, private loans, and official assistance. Most developing countries now

consider FDI as an important source of development. FDI not only brings in capital but also


14/63


introduces advanced technology that can enhance the technological capability of host country

firms, thereby generating long-term and sustainable economic growth of the investment

receiving country. FDI goes to countries where the currency is weaker as a given amount of

foreign currency can buy more investment. The countries adopted aggressive economic policies

to improve the growth rate of real gross domestic product (GDP). Foreign direct investment

promotes economic growth though improved technology transferee, efficiency, improvement in

the quality of production factors and enhanced production.

1.5 Research questions\ hypothesis:What are determinants that affect the foreign direct investment in Pakistan?

Ho: There is no significant relationship between GDP Growth and foreign direct investment

H1: There is significant relationship between GDP Growth and foreign direct investment

Ho: There is no significant relationship between exchange rate and foreign direct investment

H1: There is significant relationship between exchange rate and foreign direct investment

Ho: There is no significant relationship between interest rate and foreign direct investment

H1: There is significant relationship between interest rate and foreign direct investment

Ho: There is no significant relationship between GDP Growth and exchange rate

H1: There is significant relationship between GDP Growth and exchange rate

Ho: There is no significant relationship between GDP Growth and interest rate

H1: There is significant relationship between GDP Growth and interest rate

Ho: There is no significant relationship between exchange rate and interest rate

H1: There is significant relationship between exchange rate and interest rate


15/63


1.6 Definitions:

GDP is the total market value of all final goods and services produced in a country in a given

year, equal to total consumer, investment and government spending, plus the value of export,

minus the value of imports.

Money that is invested from one economy to another economy by getting benefits or rewards orsome related profits is known as foreign direct investment.

Exchange rate is known as the amount of currency of one countrys expressed in another

country's currency.

The amount charged by the principal or lender, to a borrower for the use of assets is called

interest rate.


16/63


Chapter # 2

Literature Review

Literature Review

The determinants of FDI are discussed in the literature. The determinants of FDI are useful to

select the explanatory variables that are used and found to be significant determinants of FDI in

Several studies like [Agarwal (1980); Gastanaga et. al. (1998); Chakrabarti (2001) and Moosa

(2002)]. For example [Markusen and Maskus (1999); Lim (2001); Love and Lage-Hidalgo

(2000); Lipsey (2000) and Moosa (2002)] highlight the location of FDI can relate to the domestic

market size and differences in factor costs. The large economies of scale, market size and its

growth are important for those foreign investors who like to operate in industries, because to

attains a certain threshold size they can use scales economies. GDP, GDP/capita and growth in

GDP are the most widely used measures of market size with the signs of positive. (Aqeel and

Nishat, 2004)

The major components of the cost function is one of the labor cost, to deters FD, other things

being equal to that high nominal wage. Which engage in labor-intensive production activities this

must be true for that type of firms. This variable has the expected sign is negative. [Kravis and

Lipsey (1982); Wheeler and Mody (1990); Lucas (1993); Wang and Swain (1995) and Barrell

and Pain (1996)] are the studies that find no significant or a negative relationship between wage

and FDI. But higher wages do not always deter FDI in all industries, [Moore (1993) and Love

and Lage-Hidalgo (2000)] many other researchers have found a positive relationship between

labor costs and FDI. Because hi-tech research oriented industries in which the quality of labor


17/63


matters, prefer high-quality labor because they indicate higher productivity and cheap labor-

quality means low productivity.

The impacts of specific policy variables on FDI in the host countries a few researchers have also

studied with several variables include openness of trade, tariff, taxes and exchange rate.

Gastanaga, to determine foreign direct investment inflows, Nugent, and Pashamova (1998) and

Asiedu (2002) focus on policy reforms in developing countries. The significant determinants of

FDI are corporate tax rates and degree of openness to foreign direct investment. Similarly within

the context of horizontal and vertical specialization within MNEs, many recent models highlight

the effect of tariffs on FDI [Ether (1994, 1996); Brainard (1997); Carr, Markusen, and Maskus(2001)].

The market seeking behavior can be associated with horizontal FDI and is forced by lower trade

costs. Hence horizontal FDI induce firms to engage in high tariff barriers, and thus encourage

production abroad by foreign affiliates. A positive relationship between import duty and FDI

implies by this tariff jumping theory. While individual affiliates sp ecializing in different stages

of production of the output can be characterized by a typical vertical FDI. Factor price

differentials across countries then semi-finished products, production process, parent firms and

affiliates take advantage of it. Due to lower cost of their imported intermediate products, the

vertical production networks may be encouraged to invest in a country with relatively low tariff

barriers because in this case the expected sign of import duty variable is negative. Imports have

incr eased by MNCs where the tariff rate less due to trade liberalization in the developing

countries. As a result of the recent structural reforms For Pakistan, Khan (1999) confirms that

imports have increased by MNCs as trade is being liberalized.


18/63


The fiscal incentives and taxation structure is very important for foreign investors. The

profitability of investment projects are affected by tax rate. Therefore where taxes are low

foreign investors seek locations. To attract FDI inflows various tax break regimes are offered to

multinationals as an incentive. [Newman and Sullivan (1988); Gastanaga, et al. (1998);

Billington (1999); Shah and Masood (2002) and Campa (2002)] these studies found out a

negative relationship between taxes and the location of businesses. On the other hand there is no

support on the impact of taxes on FDI by Carlton (1983); Hines and Rice (1994) and Hines

(1996). Interestingly, on inward FDI a significant positive effect of taxes. Although the direction

and magnitude of influence is far from sure likewise the effect of exchange rate movements onFDI flows is a fairly well studied topic. A depreciation of the host currency should increase FDI

into the host country, and conversely an appreciation of the host currency should decrease FDI

claimed by Froot and Stein (1991). Similarly, the lagged variable of exchange rate is positive

which indicates that a depreciation of the peso encourages US direct investment in Mexico after

some time acknowledge by Love and Hidalgo (2000). An appreciation of the host currency will

in fact increase FDI into the host country that suggests that an appreciation of the host currency

increases expectations of future profitability in terms of the home currency by Froot and Stein

(1991); Campa (1993), while analyzing foreign firms in the US. (Aqeel and Nishat, 2004)

In the developing countries far surpassing portfolio equity investment, private loans, and official

assistance so FDI has remained the largest form of capital flow over the last couple of decades.

Net foreign resource flows to developing countries, accounted for 45 percent FDI in 1997

compared with 16 percent in 1986. Moreover, developing countries received 36 percent of total

FDI flows in 1997 reported by World Bank (2002).


19/63


FDI as an important source of development most developing countries now consider, but FDI

economic effects are impossible to either predict or measure with precision. However, significant

role of FDI in economic growth of host developing countries are indicates in many empirical

studies, because FDI contribute in human resources development, technological transfer, capital

formation and international trade.

Over the last two decades Pakistan has received comparatively higher amount of FDI. Pakistan

received high amount of FDI due to its market-oriented policies, conducive environment for

investment and reemphasis on the private sector for economic growth especially during the

decade of 1990s. The size and percentage of gross capital formation (GCF) can be explained thedimension of the FDI flows into Pakistan. Due to the regularity policy framework the size of FDI

inflows in Pakistan was not significant until 199.

However, it was expected to assume a larger role in catalyzing Pakistan economic development,

under the new policy regime. The post-liberalization period indicates that there has been a steady

build up in FDI inflows. From $41 million in period (1970-74) to $5009 million in (1990 99)

actual inflows have increased. However, the pace of FDI inflows to other developing countries in

Asia has greater as compared to Pakistan.

In early 1970s the government becomes biggest player in the economy because Pakistan went for

nationalization. Pakistan opened its economy and allowed foreign investments During 1990s.

The role of local sector in the major services of banking, insurance, and commerce stuck the

foreign investment In 1960s. In the fields of banking, insurance and commerce the foreign

investment was not allowed during 1960s. Due to nationalization drive and excessive regulation

of trade and commerce from the government, the foreign investors discouraged more in 1970s.


20/63


The desired results of the nationalized organization in terms of economic activity and growth of

the economy could not come up to the expectations of the government. So the government

softened its stance on foreign investments and gradually started allowing the foreign investment

in the country due to the failure of the nationalized organizations. Initially it allowed in the areas

where advanced technology, technical skills, and marketing expertise were involved and only

joint equity participation with local investors. Government established Export Promotion Zones

(EPZ) for facilitation of export-oriented industries and government also encouraged the overseas

Pakistanis to send their investments in EPZ on non repatriable investment basis. (Azhar and

Ahmed, 2004)Foreign direct investment (FDI) is determined by three sets of advantages for a firm in satisfying

the needs of its customers at home and abroad which direct investment should have over the

other institutional mechanisms available. The first of the advantages is firm has over its rivals in

terms of its brand name, patent, or knowledge of technology and marketing called the ownership

specific one because ownership allows firms to compete with the other firms in the markets it

serves, regardless of the disadvantages of being foreign. The second advantages is relate to firm

operation and invest in the host country called as location-specific advantages and are those

advantages make more attractive site for FDI as chosen the foreign country than the others. For

instance, transportation costs are too high to serve these markets through exports so firms may

invest in production facilities in foreign markets. Because that makes physical investment

advantageous over serving the market through exports due to policy factors such as tariff rates,

import restrictions, issues of market access, directly related to the actual nature of the good, a

high bulk item or a service that needs to be provided on site. Characteristics such as large

domestic markets, availability of natural resources, an educated labor force, low labor cost, good


21/63


institutions (the clarity of countrys law, efficiency of bureaucracy, and the absence of

corruption), political stability, corporate and other tax rates are location advantage. Governments

can influence directly through location-specific determinants.

The third advantage is to gain the product licensing, capital lending, or technical assistance

because o f internationalization advantage, that is why a bundled FDI approach is preferred to

unbundled. The exploitation of ownership -specific and location-specific advantages by

investing in foreign affiliates generates superior commercial benefits for firms that they control,

rather than through transactions with unrelated firms located abroad.

Under the broad categories of cost-related investment environment improving and othermacroeconomic factors both for the short-run and long-run location determinants of FDI. The

European investment in the Thai manufacturing sector has been more responsive to the

macroeconomic factors in short-run dynamics. The European investment has been more

responsive to the investment environment improving factors suggest that long-run dynamics on

the other hand. In particularly, when the Thai manufacturing sector is losing its cost-related

comparative advantages.

Long-term relationship between FDI, economic growth, and other socio-political determinants

and causality are studied in research. Since evidence is exist about the relationship between FDI

and economic growth. The economic growth, exchange rate, and level of interest rates,

unemployment, and political stability they considers as determinants of FDI inflows for Pakistan

over the period 1970-2002. Theoretically expected signs with two-way causality relationship

almost all variables have.

The significant gap exist between, recent empirical evidence on the relative importance of

determinants of FDI in developing countries and allegedly, globalization-induced changes in


22/63


international competition for FDI. Dominant factors are traditional market-related determinants.

Only the availability of local skills has clearly gained importance among non-traditional FDI

determinants. The tariff jumping motive for FDI became a hotly debated issue because it had lost

much of its relevance well before globalization.

The determinants of FDI inflows for a group of European regions are being analyzed. The

disaggregated regional data are the originality of their approach. First, they discuss the

importance of the macroeconomic determinants in attracting FDI and develop a qualitative

description of their database. Then, to identify the potential determinants of FDI, they

provide an econometric exercise. They show that regional FDI inflows rely on a combinationof factors that differ from one region to another in spite of choosing regions presenting

economic similarities.

They re-examine the role of institutions in the host and in the source country by estimating a

gravity equation for bilateral FDI stocks that includes governance indicators for the two

countries. Second, by implementing a three-stage procedure for instrumentation and

orthogonalization they tackle multi-co linearity and endogeneity bias. Third, by using a new

database constructed by the French Ministry of Finance network in 52 foreign countries they

look further into the detail of institutions. The relevant institutional features are derived from

this database, which are very helpful for studying the impact of the institutional environment of

the host country coverage. The impact of the institutional environment in the source country it

does not allow going deeply as well as into the impact of institutional distance. Hence Fraser

database provides fewer details on institutions, although on more balanced country coverage

between industrial and developing countries. Finally, they study the impact of institutional

distance on bilateral FDI.


23/63


The flow of FDI to the region continues to be disappointing and uneven despite economic

and institutional reform in Africa during the past decade. In their study, to explore whether the

stylized determinants of FDI, affect FDI flows to Africa in conventional ways they use the fixed

and random effects models. Research identifies the following factors as significant for FDI

flows into Africa: economic growth, inflation, openness of the economy, international reserves,

and natural resource availability, based on a panel dataset for 29 African countries over the

period 1975 to 1999. The unimportant FDI flows to Africa were political rights and

infrastructures, contrary to conventional wisdom.

Researcher study the linkage between FDI and trade, and other macroeconomic variables and themacroeconomic determinants of FDI from Japan and the United States into East Asian countries.

They classifies them based on statistical tests of fixed effects models using panel data and their

analysis focuses on the structural differences among East Asian counties. This will helps us to

clarify how Japanese and American multinational firms position their production bases in East

Asian countries within their international marketing strategies. To confirm the validity of panel

regression results they examine simultaneous equation models in order to avoid the problem of

simultaneity among variables. (Wahid, N.d)

The business or investment climate are most important determinants of FDI, is doing business in

a foreign country in the friendlier business climate lowers the additional costs. These costs have

included in factors like: bureaucratic and judicial hurdles, issues of property rights, enforceability

of contracts, labour regulations, political and macroeconomic stability etc. In general, the host

country less attractive for any type of FDI there greater bureaucracy, more restrictive

performance requirements, unstable political situation or economic instability would make. (1)


24/63


Economic factors and, (2) factors that have to do with regulatory, bureaucratic, political and

judicial environment are two categories of these factors.

The second category of factors is the effects of the quality of the institutional environment from a

country on the FDI in the respective economy. To answer the following question: how the

inflows of FDI effected by different measures of government quality (corruption, bureaucratic

delays, property rights index, business regulation index, political stability, government

effectiveness, regulatory quality, rule of law). Why capital does not flow from rich to poor

countries answering this question will also explain.

The aims behind this research is that good macroeconomic policies and good domesticgovernance paper is the fact that international financial integration appears to be beneficial to

growth. Physical capital or profits by low protection of property rights over could be a severe

obstacle to investments. Slow bureaucracy and corruption can delay the distribution of permits

and licenses, also slowing down the process of investing in a country. With good governments

tend to do better in attracting FDI. The quality of domestic institutions and of its macroeconomic

framework, a country obtained benefits from financial globalization.

The due to the difficulty of measuring such qualitative variables lack of empirical studies in this

field is mostly. Weak institutions and policies provide evidence for the fact that international

financial integration in countries - for example, weak financial and legal systems - from capital-

scarce countries to capital-abundant countries with better institutions may actually induce a

capital outflow.

The factors like bureaucratic delays, judicial transparency, and performance requirements are not

very encouraging for empirical evidence. This is due to great measurement problems. Business

International Index of many domestic sociopolitical factors found it to be insignificant for US


25/63


manufacturing FDI including bureaucracy and red tape, quality of the legal system and

corruption. The mixture of economic factors such as economic growth, balance of payments

performance is Business Environment Risk Intelligence index and sociopolitical factors as well

as currency convertibility like attitude towards foreign investors, political continuity and

enforceability of contracts. This index was insignificant when the ratio exports/GDP was added

as another independent variable but turned significantly positive in some models.

A global-skeptic as qualified, capital account liberalization should have beneficial effects in

countries with strong institutions finds no evidence in the data set he uses that. Which the capitalaccount was free of restrictions he uses as an indicator of capital account liberalization the

proportion of years during 1975-1989 for. Indexes of the quality of public institutions yields as

insignificant coefficients, interacting this indicator with. (Anghel, 2004)

Investment should be a function of expected future interest rate, prices and taxes Neo-classical

investment model. The ratio of output price to the implicit rental price of the services of capital

goods that the desired stock of capital depends on planned output and. The investment decisions

depend upon the cost of capital implies. The observed rate of interest, capital is accumulated to

provide capital services that are inputs to the productive process. The firms adopt the criterion

for optimal capital accumulation, under certain conditions, to maximize its net worth neo-

classical theory suggests that. While analyzing the investment behavior of the investing firms

this model is used by various economists (Jorgenson & Siebert, 1968; Hufbauer, 1975; Guisinger

& Kazi, -1978; Bond & Guisinger, 1985; Auerbach, 1990; Samuel, 1996; and Wong & Swain,

1997). While using panel data for US manufacturing firms for the period 1972-90, this model on

top in ranking for time series analysis with and without lags. While adopting the same


26/63


computation the cost of capital an influential factor in the context of Pakistans private

investment decision making process. (Shah, 2004)

To investigate the impacts of exchange rate, exchange rate expectation, and exchange rate

variability on FDI into emerging market countries but with different specification and variables.

Investors do not revise their expectations of future exchange rate to the full extent of changes in

current exchange rate that owing to inelasticity in expectation. This implies that immediately

after devaluation the foreign currency would be temporarily cheap if they believe that a

devaluation of a foreign currency will be followed by a mean reversion of the exchange rate. The

foreign asset currently appears to be cheap relative to its expected future income stream becauseFDI would flow to the country under these circumstances. The future level of the exchange rate

by less than the amount of the current appreciation, creating expectation of a future devaluation

of the currency and reducing FDI inflows to the host country an appreciation in a host country

currency raises expectations about.

The US investor is interested buying a Thai office building at a cost 50 million baht (Thai

currency unit). The cash available to investor has one million US dollar. The exchange rate is 25

baht/ US dollar in this scenario obviously the investor cannot purchase the building. The dollar

appreciates to a value of 50 baht then investors baht wealth increases to 50 million baht and now

he is able to buy the building. The depreciation of the baht has increased the relative wealth of

the investor and changed the purchasing outcome. The dollar would depreciate to a value of 40

baht the investor may also expect. The investor would like to repatriate some profits in the dollar

terms would gain benefits from the expected devaluation. The expectation in (future) local

currency appreciations leads to higher FDI inflows to a host country, the devaluation of local

currency. The motives for FDI will depend on the effects of exchange rates. The model is


27/63


probably inappropriate for explaining export oriented FDI in the country. When the foreign

investor would deter his export-oriented investment to the country where they expects that an

appreciation of local currency may happen. The FDI inflows would be existed instead where FDI

would not be higher in the country and a negative relationship of the expectation in local

currency appreciation. However, due to unavailability of detailed data on FDI motives we cannot

test for this in this paper. (Morrissey, 2006)

In enterprises operating outside of the economy of the investor FDI refers to an investment made

to acquire lasting interest. The investors purpose in FDI is to gain an effective voice in the

management of the enterprise. The investment is termed the direct investor makes foreignentity or group of associated entities. The direct investment is made- is referred to as a direct

investment in which enterprise unincorporated or incorporated enterprise - a branch or

subsidiary. FDI commonly bears three broad characteristics at an operational level. First as a

source of external financing rather than necessarily net physical investment. Second a 10 percent

threshold value of ownership as a matter of convention FDI involves.

Third, between the direct investor and the direct investment enterprises aimed at maintaining,

expanding or reducing investments FDI consists of both the initial transaction that creates (or

liquidates) investments as well as subsequent transactions. New foreign equity flows (which is

the foreign investors purchases of shares in an enterprise in a foreign country), intra -company

debt transactions (which refer to short-term or long-term borrowing and lending of funds

including debt securities and trade credits between the parent company and its affiliates) and

reinvested earnings (which comprises the investors share of earnings not distributed as

dividends by affiliates or remitted to the home country, but rather reinvested in the host country)

FDI is consisting on these three broad aspects. M&A of existing local enterprises or Greenfield


28/63


investments could either be in the form new equity flows (i.e., establishment of new production

facilities). (S. Rajan, 2007)

However, it is supplemented by other external finance such as FDI from the perspective of the

MENA1 countries, given their low savings rates and access to international capital markets; their

capacity to invest is limited unless. FDI brings with it several positive externalities as mentioned

earlier such as productivity gains and technology transfers also attracting FDI has been a widely

recommended policy to developing countries. Moreover, foreign investments can become

valuable channels for the transfer of technology, knowledge and modern practices particularly in

Greenfield projects. However, the MENA region has attracted only small proportion of theglobal stock of FDI comparing the distribution of FDI inflows across developing regions. FDI

inflows seem to match the pattern of distributions of these flows. FDI inflows directed to MENA

region, as compared with Asia and Latin America could explain the scarcity of studies dealing

with. The MENA countries in attracting FDI raises the following questions due to poor

performance: what can policy makers in these countries do improve the flow of FDI to their

countries? What factors are responsible for this and we need to examine the main drivers of FDI

for these questions.

There are some interesting features to be discovered if one analyzes the historical FDI inflows to

MENA countries. But have not kept pace with global FDI inflows Regional inflows recently

increased,. The global FDI inflows grew from an average of US$200 billion in the period 1989-

1995 to US$127 trillion in 2000, which is an increase of 535 percent. The increase remained high

at 307 percent only at developing countries. During the same period, the regions share n terms

of the world was only 0.4 percent however FDI inflows to MENA only increased at a rate of 71


29/63


percent by the year 2000 . Although the net FDI flows to the region positively increased as FDI

stock rose from US$39.2 billion in 1985 to US$85.3 billion in 2000 from 1985 to 2000.

Although the FDI/GDP ratio in the MENA region has remained below 1 percent ever since

increased to 1.27 percent in 1998 otherwise it has been declining. Notice from Table 2 that Sub-

Saharan Africa (SSA), attracted substantially more FDI than the MENA region during the past

decade regarded as one of the poorest regions in the world. It continues to attract abysmal flows

of FDI compared to SSA that received about 10 times more FDI than MENA in 1999 Despite the

MENA region being home to some of the richest oil-producing countries in the world and almost

two decades of implementation of structural adjustment. (SIDIROPOULOS, 2010)A mixture of factors in terms of economic growth in case of Pakistan that includes income, real

interest rate, dependency ratios, foreign capital inflows, foreign aid, changes in terms of trade,

and openness of the economy such as a number of studies have examined determinants. To

investigate the relationship between structural adjustment lending and real output growth are

seems in study. The negative link between structural adjustment lending and output growth, and

worsening the terms of trade and economic output in the country results indicates. Finally,

favorable weather real domestic savings stimulate the real economic growth rate and condition.

Capacity utilization, real devaluation, increased foreign demand are main contributors of

economic growth in the country. But military expenditures are contra-dictionary to economic

growth in the case of Pakistan. Study posits positive impact on real GNP growth of foreign

private investment. The openness of trade is positively associated with economic growth while

budget deficit results reveal that and external debt reduce growth of output. The impacts of

remittances on economic growth positively associated with high significance. For the economic

growth in the country Public and private investment is also an important source.


30/63


Economic growth negatively correlated with inflation rate, external debt and worsening situation

of terms of trade are to be appeared. Research reassesses the impact of some macroeconomic

variables on economic growth. In the long run financial sectors de velopment improves the

performance of the economy. For financial development, Credit to private sector as a share of

GDP, used as a good predictor of economic growth for case of Pakistan. While Inflation and

imports both reduce economic growth similarly, rise in exports and investment boost economic

growth. Small size of the government associated with high economic growth. (Ahmed and

Chaudhary, 2008)

Size of the market, the potential for growth and the absorption of output, and the incentivemechanism of the host country and the cost of international production as compared to export

and licensing are the determinants of Foreign Direct Investment which support the positive

relationship between FDI and market size. Proxies used for size, growth rate and absorption are

Gross Domestic Product, Gross National Product, Per Capita GNP, GDP growth rate and exports

from the home country and these reflect expected sales of the subsidiaries and their profitability.

(Masood and Shah, 2003)

The due to low costs of production (the taxation policy) and the future expectation of the

investing firms investment incentive mechanism is conceived to be two -dimensional

attractiveness. The cost of capital, relative wage rate, transportation costs and the fiscal

incentives consist on cost factors in the form of tax expenditure provisions offered by the host

country. Negative relationship between FDI and the cost of capital shows negative results in both

developed and developing countries. Positive relationship between FDI and fiscal incentives

offered by host countries some research indicates. The ability of the host country to serve


31/63


external liabilities and the structure of the economy affected to Future expectations of the

investing firms. Low level of foreign exchange resources is unable to attract FDI with highly

indebted countries. Manufacturing sector has little attractiveness for FDI inflows in an agrarian

economy with small share. Conversely, the positive sign of encouragement for inward FDI due

to an increasing share of industrial output in GDP. The balance of payments position of the

recipient country is indicated by Sectoral structure. The most needed capital fund, advanced

production technique, snobbish managerial skills, advertising and marketing expertise, global

links a nd the controversial phenomenon of transfer pricing FDI brings. A relatively high

growth rate of GDP (averaging around 6 percent) Pakistan, the worlds 7th most populatedcountry with 140 million people, with a variety of investment provisions has remained

unattractive for FDI inflows and a significant stock of natural resources. (Masood and Shah,

2003)

When foreign firms buy locally made inputs or when foreign firms supply source intermediate

inputs to local firms Inward FDI can stimulate local investment by increasing domestic

investment through links in the production chain. Furthermore, inward FDI can increase the host

countrys export capacity foreign exchange earnings. (Ahmed, Alam and Butt, (2003)

FDI can have impact on income. FDI stimulates economic growth more than other sources of

capital inflows most of the developing countries rely on FDI as a source of external finance.

Particularly, FDI bring modern technology, market access and managerial knowhow. To expand

productive capacity by increasing fixed investment in the host countries financial resources are

largely used, and productive capacity improve by managerial know-how. (Khan, 2007)


32/63


For FDI inflows the policy given the strong competition among countries, Governments of

different countries are competing among themselves to attract more FDI inflows with a variety of

investment and tax incentives and other policy preferences. (kumar, 2001)

Capital will flow from where its return on investment is lowest to where its return is highest

Economic theory predicts that, in the absence of market distortions, increasing world output and

the global efficiency of resource use. Among developed countries FDI has been increasingly

concentrated. In the composition of inward capital flows developing countries have experienced

a shift over the past 20 years. (Milberg, 1990)

Around industrial organization economics the theory of foreign direct investment (FDI) has sofar been built most extensively, with a particular focus on either market structure the theory of

the firm and economics of internalization. (Ozawa, 1992)

To attract foreign direct investment (FDI) economic policy makers in most countries go out of

their way. A high level of FDI inflows is the guarantee of the future economic health of that

particular country an affirmation of the economic policies that the policy makers have been

implementing as well as a stamp of approval. (Rongala and Ghosh, 2008)

The needed capital for domestic investment foreign direct investment (FDI) provides to the

developing countries. The FDI brings employment opportunities, helps transfer managerial skills

and technology, so they all contribute to economic development. (Quazi and Mahmud, 2004)

Policy and political stability, rules relating to FDI, international agreements on FDI, and

privatization, trade and tax policies are Policy determinants of FDI. Market-seeking, resource-

seeking and efficiency-seeking are further categorization of the economic determinants.

(Ancharaz , 2003)


33/63


To avoid implementing expensive and potentially harmful incentive schemes, it is important for

policy makers in developing and transition economies to achieve more knowledge about the

effects of FDI inflows and what host country factors determine the volume of inflows. Such

knowledge should help decision makers adopting economic policies not only serving to attract

FDI but maximizing the benefits and diminishing the potential disadvantages of the FDI inflows

the host economy receives. This dissertation aims to provide knowledge about the nature of FDI

that can help policy makers in host countries to take appropriate decisions. (Johnson, 2005)

Developed countries have often urged developing countries to adopt FDI-friendly policies in

hopes that the increase in capital flows will lead to more robust economic growth. Through positive externalities and spillover effects, growth should increase real income for poor citizens

and promote general economic development. (Kapfer and Neilsen, 2007)

FDI to developing countries rose to over US $95 billion in 1995 and to 38% of global FDI,

nearly quadrupling from US $25 billion and 12 percent in 1990. The share of emerging

economies FDI is increasing more rapidly than that of industrialized economies. The

distribution of FDI to developing countries is markedly uneven, however, with circa 50 percent

flowing into East Asia and 28 percent into Latin America. (Wilhelms, 1998)

Export-led economic growth is a development model which offers emerging markets the chance

to grow via increased integration with the world economy. In the process of such integration,

new jobs are created, incomes are raised, and poverty is reduced. Many developing countries are

reforming or have reformed their economic policy environments in order to pursue this model.

(McMillan, Pandolfi, and Salinger, 1998)


34/63


While developing countries began to reduce or remove restrictions on FDI during the 1980s, the

trend became pronounced and widespread during the early 1990s as increasing numbers of

policy makers came to believe that integration into the world economy was a prerequisite to

growth and development and that FDI from transnational corporations was the vehicle to

accomplish that end. (kobrin, 2005)

In general, attracting FDI has been recognized as a successful strategy for economic growth and

prosperity, especially in less developed countries and RTA membership has proven effective in

attracting FDI by creating a positive market size effect and providing a better investment

environment that is favorable to foreign investors. In particular, RTA membership can be adevice to ensure commitment to domestic reform for attracting more FDI. (Park, 2007)

To examine productivity spillovers from foreign-owned to domestically owned firms, as Lipsey

(2002) mentions, is to understand the contribution of inward FDI to host country economic

growth. If foreign firms at the expense of lower productivity in domestic firms achieve higher

productivity, there might be no implications for aggregate output or growth. However, there

might be growth effects without spillovers just from the operation of foreign firms, which can be

analyzed in terms of the impact of FDI on a countrys output or growth. (Alfaro, 2003)

Foreign investors are influenced by three broad groups of factors: (i) the profitability of the

projects, (ii) the ease with which subsidiaries operations can be integrated into investors global

strategies, and (iii) the overall quality of the host countries enabling environment. (Mehmet,

2002)

FDI takes one of the following four forms: joint ventures, contractual joint ventures, wholly

owned foreign firms, and joint exploration (mainly for offshore oil). Joint ventures are by far the


35/63


dominant form of FDI, accounting for roughly half of all FDI throughout the sample. (Jin Wei,

1996)

Foreign investment continued to be discouraged in those sectors still protected by import

substitution measures because the Korean government feared that otherwise the economy would

become dominated by foreign firms. Moreover, the Korean government wanted to channel the

limited amount of capital resources to industries vital to long-term economic growth. (Hwang,

2000)

Theoretical Model:

GDP Growth

Real exchange rate

Real interest rate

Foreign direct investment


36/63


CHAPTER # 3

DATA & METHODOLOGY

3.1 DATA

Data are relating to the factors that affect the FDI in Pakistan like FDI, GDP growth, exchange

rate and interest rate.

3.1.1 Paradigm

The inquiry focuses on the determination of the general trends of a defined population. The

features of the social environment retain a high degree of constancy across time and space. Local

variations are considered "noise" Study of samples and population.

Positivist paradigm means there is a single reality that can be measured. The researcher and

research can remain independent of one other and not influence one another. Findings of

research can be generalized from the study sample to the larger target population. Cause and

effect relationship can be tested. Research can be conducted objectively and value free.

3.1.2 Secondary data

I collect the secondary data from the WDI because my study depends on secondary data in which

I examine the factors that affect the FDI in Pakistan


37/63


3.2 METHODOLOGY

Descriptive statistics include the numbers, tables, charts, and graphs used to describe, organize,

summarize, and present raw data.

A scatter diagram is a tool for analyzing relationships between two variables. One variable is

plotted on the horizontal axis and the other is plotted on the vertical axis. The pattern of their

intersecting points can graphically show relationship patterns. Most often a scatter diagram isused to prove or disprove cause-and-effect relationships.

A correlation is a number between -1 and +1 that measures the degree of association between

two variables. A positive value for the correlation implies a positive association. A negative

value for the correlation implies a negative or inverse association.

Regression analysis is a statistical tool for the investigation of relationships between variables.

Usually, the investigator seeks to ascertain the causal effect of one variable upon another the

investigator also typically assesses the statistical significance of the estimated relationships,

that is, the degree of confidence that the true relationship is close to the estimated relationship.

Regression Eq. is y = a + bx

Where a is constant

And b is co-efficient of x


38/63


Chapter # 4

Analysis

4.1 Descriptive statistics:

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

GDP_growth 7 7.00 8.00 7.4286 .53452

Real_effective_exchange_rat

e7 7.00 8.00 7.4286 .53452

real_interet_rate 7 7.00 8.00 7.4286 .53452

Foreign_direct_investment 7 7.00 8.00 7.4286 .53452

Valid N (listwise) 7

Interpretation:

This table shows the descriptive statistics where GDP growth have mean 7.42 and std, deviation

is .534, real exchange rate have mean 7.42 and std, deviation is .534, real interest rate have mean

7.42 and std, deviation is .534 and foreign direct investment have mean 7.42 and std, deviation is

.534. the minimum response is 7 and maximum response is 8 in all variables.

4.2 Histogram:


39/63


Interpretation:

The graph shows the graphical representation of the bars that is showing the response of data

regarding GDP GROWTH. Most of the data lies in the option 9 7.


40/63


Interpretation:


regarding real exchange rate. Most of the data lies in the option 8 7.


41/63


Interpretation:


regarding real interest rate. Most of the data lies in the option 8 7.


42/63


Interpretation:


regarding foreign direct investment. Most of the data lies in the option 8 7.


43/63


4.3 Scatter plot:

Interpretation:

This scatter plot is shows the two scale variables: GDP Growth and real exchange rate. The line

shows that relationship is positive between GDP Growth and real exchange rate this means that

where exchange rate decrease here GDP Growth rate increase. When we subtract the sq.

quadratic from linear then we know that here Pearson correlation is applicable.


44/63


Interpretation:

This scatter plot is shows the two scale variables: GDP Growth and real interest rate. The line

shows that relationship is positive between GDP Growth and real interest rate this means that

where real interest rate decrease here GDP Growth rate increase. When we subtract the sq.

quadratic from linear then we know that here Pearson correlation is applicable .


45/63


Interpretation:

This scatter plot is shows the two scale variables: GDP Growth and foreign direct investment.

The line shows that relationship is positive between GDP Growth and foreign direct investment

this means that where foreign direct investment increase here GDP Growth rate increase. When

we subtract the sq. quadratic from linear then we know that here Pearson correlation is

applicable.


46/63


Interpretation:

This scatter plot is shows the two scale variables: real interest rate and real exchange rate. The

line shows that relationship is positive between real interest rate and real exchange rate this

means that where exchange rate is low there real interest rate increase. When we subtract the sq.

quadratic from linear then we know that here Pearson correlation is applicable.


47/63


Interpretation:

This scatter plot is shows the two scale variables: foreign direct investment and real exchange

rate. The line shows that relationship is positive between direct investment and real exchange

rate this means that where exchange rate is low there foreign direct investment increase. When


applicable.


48/63


Interpretation:

This scatter plot is shows the two scale variables: foreign direct investment and real interest rate.

The line shows that relationship is positive between direct investment and real interest rate this

means that a decrease in interest rate can cause the increment in foreign direct investment. When


applicable.


49/63


4.4 Correlations

Correlations

GDP_growth

Real_effective_e

xchange_rate

GDP_growth Pearson Correlation 1 1.000 **

Sig. (2-tailed) .000

N 7 7


e

Pearson Correlation 1.000 ** 1


N 7 7

**. Correlation is significant at the 0.01 level (2-tailed).

Interpretation:

This Table represents the correlations. Where the variable GDP are positively correlated to real

exchange rate (r= -1.000, p = .000).The magnitudes of the above discussed two correlations are

greater than 0.33 in the absolute terms, which shows the strong correlations between the said

pairs of the variables.


50/63


Correlations

GDP_growth real_interet_rate



N 7 7

real_interet_rate Pearson Correlation 1.000 ** 1


N 7 7


Interpretation:

This Table represents the correlations. Where the variable GDP are positively correlated to real

interest rate (r= - 1.000, p = .000). According to the Cohens table the value of Pearson

correlation is greater, which shows the strong correlations between the said pairs of the variables.


51/63


Correlations

GDP_growth

Foreign_direct_i

nvestment



N 7 7

Foreign_direct_investment Pearson Correlation 1.000 ** 1


N 7 7


Interpretation:

This Table represents the correlations. Where the variable GDP are positively correlated to

foreign direct investment (r= - 1.000, p = .000). According to the Cohens table the value of

Pearson correlation is greater, which shows the strong correlations between the said pairs of the

variables.


52/63


Correlations

Real_effective_e

xchange_rate real_interet_rate


e

Pearson Correlation 1 1.000 **


N 7 7

real_interet_rate Pearson Correlation 1.000 ** 1


N 7 7


Interpretation:

This Table represents the correlations. Where the variable real exchange rate are positively

correlated to real interest rate (r= - 1.000, p = .000). According to the Cohens table the value of

Pearson correlation is greater, which shows the strong correlations between the said pairs of the

variables.


53/63


Correlations

Real_effective_e

xchange_rate

Foreign_direct_i

nvestment


e

Pearson Correlation 1 1.000 **


N 7 7



N 7 7


Interpretation:

This Table represents the correlations. Where the variable real exchange rate are positively

correlated to foreign direct investment (r= - 1.000, p = .000). According to the Cohens table the

value of Pearson correlation is greater, which shows the strong correlations between the said



54/63


Correlations

real_interet_rate

Foreign_direct_i

nvestment

real_interet_rate Pearson Correlation 1 1.000 **


N 7 7



N 7 7


Interpretation:

This Table represents the correlations. Where the variable real interest rate are positively

correlated to foreign direct investment (r= - 1.000, p = .000). According to the cohens table the

value of pearson correlation is greater, which shows the strong correlations between the said



55/63


4.5 Regression

Model Summary

Model R R Square Adjusted R

SquareStd. Error of the

Estimate

1 1.000 a 1.000 1.000 .00000

a. Predictors: (Constant), real_interet_rate

ANOVA b

Model Sum of Squares df Mean Square F Sig.

1 Regression 1.714 1 1.714 . .000a

Residual .000 5 .000

Total 1.714 6

a. Predictors: (Constant), real_interet_rate

b. Dependent Variable: Foreign_direct_investment

Coefficients a

Model

Unstandardized Coefficients

Standardized

Coefficients

t Sig.B Std. Error Beta

1 (Constant) .000 .000 . .

real_interet_rate 1.000 .000 1.000 . .

a. Dependent Variable: Foreign_direct_investment

Excluded Variables b

Model Beta In t Sig.

Partial

Correlation

Collinearity

Statistics

Tolerance

1 GDP_growth . a . . . .000


e.a . . . .000


56/63


Excluded Variables b

Model Beta In t Sig.

Partial

Correlation

Collinearity

Statistics

Tolerance

1 GDP_growth . a . . . .000


e.a . . . .000

a. Predictors in the Model: (Constant), real_interet_rate

b. Dependent Variable: Foreign_direct_investment

Interpretation:

Multiple Regressions was conducted to investigate the best predictors of foreign direct

investment. Where statistically significant p


57/63


Chapter # 5

Discussion

5.1Discussion:

In developing countries foreign direct investment (FDI) has been widely recognized as a growth-

enhancing factor. FDI can promote economic growth, in the host country through a variety of

channels. Technology transfer and spillovers is the most important being. In economic

development economic growth has established the importance of technological progress.

The large economies of scale, market size and its growth are important for those foreign

investors who like to operate in industries, because to attain a certain threshold size they can use

scales economies. GDP, GDP/capita and growth in GDP are the most widely used measures of

market size with the signs of positive.

The fiscal incentives and taxation structure is very important for foreign investors. The

profitability of investment projects are affected by tax rate. Therefore where taxes are low

foreign investors seek locations. To attract FDI inflows various tax break regimes are offered to

multinationals as an incentive.

In the developing countries far surpassing portfolio equity investment, private loans, and official

assistance so FDI has remained the largest form of capital flow over the last couple of decades.

FDI as an important source of development most developing countries now consider, but FDI

economic effects are impossible to either predict or measure with precision. However, significant


58/63


role of FDI in economic growth of host developing countries are indicates in many empirical

studies, because FDI contribute in human resources development, technological transfer, capital

formation and international trade.

FDI to developing countries rose to over US $95 billion in 1995 and to 38% of global FDI,

nearly quadrupling from US $25 billion and 12 percent in 1990. The share of emerging

economies FDI is increasing more rapidly than that of industrialized economies. The

distribution of FDI to developing countries is markedly uneven, however, with circa 50 percent

flowing into East Asia and 28 percent into Latin America. (Wilhelms, 1998)

Export-led economic growth is a development model which offers emerging markets the chanceto grow via increased integration with the world economy. In the process of such integration,

new jobs are created, incomes are raised, and poverty is reduced. Many developing countries are

reforming or have reformed their economic policy environments in order to pursue this model.

(McMillan, Pandolfi, and Salinger, 1998)

Over the last two decades Pakistan has received comparatively higher amount of FDI. Pakistan

received high amount of FDI due to its market-oriented policies, conducive environment for

investment and reemphasis on the private sector for economic growth especially during the

decade of 1990s. The size and percentage of gross capital formation (GCF) can be explained the

dimension of the FDI flows into Pakistan. Due to the regularity policy framework the size of FDI

inflows in Pakistan was not significant until 199.


59/63


5.2 Conclusion:

By increasing fixed investment in the host countries financial resources are largely used to

expand productive capacity, managerial know-how and transfer of technology improves

productive capacity. Sales and procurement networks FDI brings to the host countries through

they expand their business opportunities.FDI is being considered as an important vehicle for

economic growth in Pakistan. For local and foreign investors Pakistan has introduced a wide

range of incentives and has increasingly tended to turn to FDI as source of capital, technology,

managerial skills and market access needed for sustained economic development. Foreign

investment is fully protected by law; including avoidance of double taxation the country providesa one-window facility for setting up business. Reforms and economic achievements in Pakistan

during the last few years have steered the country to a business-friendly environment, creating a

win-win situation for both investors and consumers.


60/63


References:

AHMED And Shah (2003) The Determinants Of Foreign Direct Investment In Pakistan:

An Empirical Investigation : The Pakistan Development Review 42: 4 Part II, Pp. 697

714

MOHAMED And SIDIROPOULOS (2010), ANOTHER LOOK AT THE

DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN MENA COUNTRIES:

AN EMPIRICAL INVESTIGATION : JOURNAL OF ECONOMIC DEVELOPMENT

75 Volume 35, Number 2

Hattari, And S. Rajan , (2007) Intra-Asian FDI Flows: Trends, Patterns, And

Determinants

Shahbaz, Ahmad, And Chaudhary, ( 2008), Economic Growth And Its Determinants In

Pakistan : The Pakistan Development Review 47 : 4 Part II, Pp. 471 486

SHAH. Z, (2003) FISCAL INCENTIVES, THE COST OF CAPITAL AND FOREIGN

DIRECT INVESTMENT IN PAKISTAN: A NEO-CLASSICAL APPROACH: A

Research Paper Submitted To Pakistan Institute Of Development Economics (PIDE)

Brindusa Anghel , (2004). Do Institutions Affect Foreign Direct Investment ? :

International Doctorate In Economic Analysis

Wilhelms , (1998), FOREIGN DIRECT INVESTMENT AND ITS DETERMINANTS

IN EMERGING ECONOMIES : African Economic Policy Paper Discussion Paper

Number 9


61/63


Wahid, Sawkut, Seetanah Determinants Of Foreign Direct Investments (FDI): Lessons

From The African Economies : Journal Of Applied Business And Economics

Atique, Ahmad, And Azhar (2004), The Impact Of FDI On Economic Growth Under

Foreign Trade Regimes: A Case Study Of Pakistan : The Pakistan Development Review

43 : 4 Part II, Pp. 707 718

Aqeel And Nishat , (2004) The Determinants Of Foreign Direct Investment In Pakistan

: The Pakistan Development Review 43 : 4 Part II, Pp. 651 664

Grg And Morrissey , (2006) FOREIGN DIRECT INVESTMENT AND EXCHANGE

RATES: A CASE STUDY OF U.S. FDI IN EMERGING MARKET COUNTRIES :Discussion Paper No. 06/05

Ahmed, Alam And Butt, (2003), Foreign Direct Investment, Exports, And Domestic

Output In Pakistan : The Pakistan Development Review 42: 4 Part II, Pp. 715 723

Khan (2007), Foreign Direct Investment And Economic Growth: The Role Of Domestic

Financial Sector, : Pakistan Institute Of Development Economics

Kumar.N, (2001) Infrastructure Availability, Foreign Direct Investment Inflows And

Their Export-Orientation: A Cross-Country Exploration: Version 1.2: 20

Milberg .W, (1990), Foreign Direct Investment And Development - Balancing Costs

And Benefits : International Monetary And Financial Issues, Vol. XI

Ozawa. T , (1992), Foreign Direct Investment And Economic Development:

Transnational Corporations, Vol. I, No. 1, Pp. 27-54.

Rajan, Rongala And Ghosh , (2008) Attracting Foreign Direct Investment (FDI) To

India

Quazi And Mahmud, (2004) Determinants Of Foreign Direct Investment In South Asia


62/63


Ancharaz. D, (2003), The Determinants Of Foreign Direct Investment In A Comparative

Perspective: Is There A Bias Against Sub-Saharan Africa?: Forthcoming In The

University Of Mauritius Research Journal

Johnson , (2005), Host Country Effects Of Foreign Direct Investment : The Case Of

Developing And Transition Economies

Kapfer And Neilsen ,2007), If You Build It, Will They Come? Foreign Aids Effects On

Foreign Direct Investment: Paper Prepared For The 65th

MPSA National Conference

Kumar, 2001) , Infrastructure Availability, Foreign Direct Investment Inflows And Their

Export-Orientation: A Cross-Country Exploration : Version 1.2: 20

Wilhelms , (1998), FOREIGN DIRECT INVESTMENT AND ITS DETERMINANTS IN

EMERGING ECONOMIES : African Economic Policy Paper

Mcmillan, Pandolfi, And Salinger , (1998), Promoting Foreign Direct Investment In

Labor-Intensive, Manufacturing Exports In Developing Countries: CAER2 Research

Report

Kobrin,(2005), The Determinants Of Liberalization Of FDI Policy In Developing

Countries: A Cross -Sectional Analysis, 1992-2001

Park , (2007), Reform-Creating Regional Trade Agreements And Foreign Direct

Investment : Applications For East Asia

Alfaro , (2003), Foreign Direct Investment And Growth: Does The Sector Matter ? :

Harvard Business School

Mehmet, (2002), FOREIGN DIRECT INVESTMENT AND REGIONAL

DEVELOPMENT : International Conference On Regional Development And Foreign

Investment In Brazil


63/63

Jin Wei, ( 1996), Why Does China Attract So Little Foreign Direct Investment?: T.

Bangserg, Journul Of Commerce

Hwang, (2000), The Role Of Foreign Direct Investment In Koreas Economic

Development

Thesis of Aitzaz Ahsan

Documents

Transcript of Thesis of Aitzaz Ahsan