Abstract

Foreign direct-investment is a major source for development for the third world countries and it

is also an important factor in developing nations such as Pakistan for economic development.

The main aim of this research paper is to identify relation of different variables with FDI.

Besides GDP, three more variables are taken in this research paper such as Domestic investment,

trade openness and inflation. Auto regressive distributed lag (ADRL) model has been used to

check the relation of these variables with the Foreign Direct Investment (FDI). The data is taken

from 1990 till 2017 and all the variables are considered as percentage and all the data are of

Pakistan. The result of the research paper shows that foreign direct investment, domestic

investment, gross domestic product and inflation has positive relation with each other but, there

is negative relation between foreign direct-investment and trade openness.

Keywords: [Foreign direct-investment, gross-domestic-product, trade openness,

domestic-investment and inflation, Pakistan, Auto regressive distributed lag (ADRL) model]
 1. INTRODUCTION

1.1 FDI Definition

According to IMF, IMF and OECD definitions, direct venture mirrors the point of

acquiring an enduring enthusiasm by an occupant substance of one economy (direct speculator)

in a venture that is inhabitant in another economy (the immediate speculation endeavor). The

"enduring interest" infers the presence of a long haul connection between the immediate

speculator and the direct venture endeavor and a noteworthy level of impact on the

administration of the last mentioned.

1.2 Basic Introduction

Foreign direct investment (FDI) is now becoming an essential source for the

development in the developing nations. FDI plays an crutial role as it increases the employment

in the country, productivity also increases, and FDI also boost up exports in the country and

transfer of technology. FDI also use for the payment of loans and because of FDI in the end the

human capital increases and living of standard rises in the country. (Falki, September 2009)

From the last few decades, the FDI is the great source of income for the developing countries.

The advantages of FDI is that it facilitate the exertion and using of local raw material, it

introduce new technique of management, access to new technology, used for financing the deficit

of current account and increases the human capital stock (Najaf, 2015) In the past year we saw

that the FDI was more in dictatorship, as in civilian government, it’s mean that foreigners more

believe or trust on dictatorship. (Adeel Ahmad Dar) Pakistan is the liberal economy. Pakistan can

put all its foreign equity in the secondary-sector. The 45% of the primary-sector get jobs as labor.

The tertiary sector has the biggest share of 58% in Pakistan’s economy. In 2003, Pakistan

primary sector rate for growth was 3.3%, secondary sector rate for growth in 2003 was 3.5% and

the tertiary-sector growth rate was 3.7%. The Pakistan primary-sector is characterized as

inefficient, low productivity and few inducements. The secondary sector is characterized as the
composed of automotive, pharmaceuticals, infrastructure and textile and electronic components.

The Pakistan tertiary sector is characterized as they consist of financial services, trade,

technology and gas and oil exploration. (Muhammad Tahir, June 15) For making better the living

standard of the people it is important to improve the economic growth of the country, which only

possible by good education and health facility in the country. The research show that the human

development can increase by promoting the economic growth. Human development is the main

focus or main aim to increase for every country around the world. (Nayyra Zeb, December 23,

2013) From the year 1990-1999, Pakistan received a huge amount through FDI because of its

positive environment, for investors. In the end of 1980 and starting of 1990s, there was very low

FDI record in Pakistan because of making the weak policies and, poor law and order-situation.

FDI can be allow in different sectors like telecommunication, agriculture, banking and

agriculture, but due to inconsistency in political-environment and policies the amount of F.D.I is

very low. According to BIP in 2001-02 the F.D.I amount was $485M after it will increase every

year. In 2007 to 2008, the F.D.I amount was $5409M. After it the amount of F.D.I start to reduce

in 2011-12. There may be some causes for this declining, the important cause of this are Global-

Financial Crises, attacks of terrorist in the country and the flood situation in the country. (Hafiz

Sohail Younus, April 2014) FDI inflows were expanded in 2007 in services sector. Telecom

sector is the main source of FDI which expand economic growth. In Pakistan, political instability

has a negative effect on FDI. Pakistan has taken some major steps to attract foreign investors. It

includes Tax incentives, some fiscal benefits and tariff reduction. Pakistan has many resources to

attract foreign investors. Growth in FDI shows the positive effect of policies made by

Government. In the last few decades, FDI remittances in the nation have been troubled by

multiple factors such as low labor productivity, weak law and nation order, country political

uncertainty, inadequate legal agency work or bad institutional results, corruption among

organizations. (Zeeshan Atique) In few decade FDI show, rapid growth in the developed and less
developing countries. Many economist try to identify that how FDI will effect on the financial

development in the country. There are the two main types of economy, closed economy and the

other one is an opened economy. In the closed economy, there is no way for foreign saving and

investment are only from domestic savings. In opened economy investment enhanced by both

foreign saving and domestic savings. FDI helps host countries to accomplish a high degree of

investment and increase their Saving ability. From the last decades in developing countries.

Foreign direct Investment remains the high type of investment capital flow, private lending and

government aid in the portfolio. As compared to mid of 1980s, in the end of 1990s, in developing

countries the FDI growth was recorded as 45% of net foreign resource flow. In 2002 World Bank

reported 36 percent of FDI flows in developing countries in 1997.

Foreign Direct Investment of Pakistan (FDI), which in April 2019 was increased by

US$ 101,8 million, contracted and increased by US$ 177,5 million in the first month. In

Pakistan's latest accounts, the account in March 2019 showed a deficit of USD 2.0 billion. In

March 2019, Pakistan's direct foreign investment expanded by 1,0 million US dollars. In Mar

2019, its investment in the external portfolio extended by $21.0 million. In June 2018, 313.1

billion USD were represented as the country's gdp.

Table 1.Country wise net Foreign Direct-Investment

Country. .2009- .2010- 2012- 2013- 2014- 2015-16 2016- 2017-18 July-Jan
10 11 13 14 15 17 2019

China (3.6) 47.4 90.6 695.8 319.1 1063.6 1211. 1812.6 825.5
7

UK 294.6 207.1 633.0 157.0 169.6 151.6 215.8 307.5 127.4

USA 468.3 238.1 227.1 212.1 223.9 13.2 44.6 136.3 58.5

Hong 9.9 125.6 242.6 228.5 136.2 93.3 17.2 4.1 29.4
Kong
 Switzerla 170.6 110.5 149.0 209.8 (6.5) 58.0 101.8 79.4 13.0
nd

U.A.E 242.7 284.2 22.5 (47.1) 213.6 109.7 120.5 10.9 59.4

Italy 4.0 7.9 199.4 97.6 115.4 105.4 60.5 56.6 24.2

Netherlan 278.6 (48.5) (118.4 5.5 (34.5) 29.9 457.6 100.2 56.8
ds )

Austria 56.8 32.4 53.3 53.8 24.8 42.7 21.7 27.4 5.1

Japan 26.8 3.2 30.1 30.1 71.1 35.4 57.7 59.8 66.6

Turkey 0.8 1.8 0.5 7.9 43.4 16.8 135.6 29.8 42.3

Others 601.3 625.1 (73.2) 47.6 (288.2 585.7 301.9 467.4 143.1
)

Total 2150.8 1634.8 1456. 1698.6 987.9 2305.3 2746. 3092 1451.3
5 8

Note: Pakistan's financial year are from 1 July, till 30 June. Number’s that are in brackets considered as negative...
Source: - Board of Investment Pakistan.
.

Pakistan being a developing country in South Asia opens great investment opportunities for its

neighboring countries. Iran, China, Afghanistan and India being neighbors our major exports and imports

are from these countries. It also provides great location for business in sectors such as agriculture and

trade.

As the chart indicates investment in Pakistan from different countries in increasing. China being the

largest investor in Pakistan indicates that our country has a potential growth. From 2015 China gradually

increases its investment in Pakistan as because of great relationship or because of CPEC agreements.

Investments in Pakistan help in improving and expanding the infrastructure for better social and economic

development. Apart from this being part of CPEC agreement various projects are started and in progress

aiming to improve transportation and rail-road systems within the country. Further investment in Gwadar

projects should be main focused area too. New government is already in talk with Chinese and Turkey

government officials for investing in projects like high speed rail system, LNG and natural gas pipeline.

Foreign Investments is linked with country economic growth. The better the foreign-investment inflows

the more sustainable economy structure is. Foreign investments open opportunities to invest in different

projects which lead in high job market, better export and trade business. With the government efforts our
Foreign Direct-Investment is growing slowly and expected to increase by 17% between 2018 and 2020.

Despite all these difficulties Pakistan has a high potential to grow after India in South-Asia region.

Countries are investing in different areas such as energy, oil, gas, transportation which will ultimately

improve FDI and economic growth in Pakistan.

Table 2. Sector wise net Foreign Direct-Investment

Sector 2OO9- 2O1O- 2O11- 2O12- 2O13- 2O14- 2O15- 2O16- 2O17- July-
1O 11 12 13 14 15 16 17 18 Jan
19
0il & Gas 74O.6 512.2 629.4 559.6 502 300.5 248.9 146 192.5 145.1
Financial (121) 155.8 (84.9) 26.8 71.4 282.2 1159.2 7OO 400.3 216.7
business
Textile 163 31O.1 64.4 314.2 192.8 256.4 289 296.1 49.7 38.5
Trade 1O1.6 61.1O 72.1O 47.7O 28.8O 53.5O 46.7O 466 143 42.O
Construction 81.5O 44.7O 41.4O 513.7O 1O6.3 94.6O (14) 533 7O9 289
Power 132.O 1O4.6 18.7 44.1 2.7 6.2 7O.2 57.6 997 233.8
Chemical 112.1O 3O.5 96.3O (47.1O) 94.9O 6O.3 88.5O 5.4O 48.9O 84.O
Transport 117.O 53.O 25.3O 5.1O (3.2O) 5O.5 26.8O 32.7O 57.O 26.O
C0mmunication 33.2O 8.8O 31.6O 25.1O 53.1O 64.3O 46.2O 48.1O 113 (133)
(IT & Telecom)
Others 790.4O 354.O (73.6O) (32.8O) 649.8O (181) 343.9O 461 383 51O
Total 2150.8 1635 820.7 1456.5 1699 987.9 2305 2747 3092 1451
Note: Pakistan's financial year are from 1 July till 30 June. The numbers that are in brackets are
considered as negative.
Source: - Board of Investment Pakistan.
.

Pakistan has a large potential to develop in different sectors with proper planning and investments. The

above explains the major increase in different sectors since 2009. Textile being Pakistan’s prime export

sector shows consistent growth since 2015. However a decline is seen in a period of 2017- 2018 which

mainly because of power issues and no proper investments made in this sector.

Pakistan’s manufacturing sector is one fourth size of the service sector. As it’s seen from the chart Trade

showed a massive increase in year of 2016 to 2017 and shows a slow growth in next year. Trade is second,

most important sector in any country, as it opens many opportunities for exporter and importers to

enhance their business, which ultimately benefit the country. Pakistan is known for his high valued export

products like Cotton, Rice, Sport goods, seasonal fruits (mangoes, oranges, etc.) If the government

supports and facilitates these businesses to produce these products in order to increase our economy with

a massive inflow of resources. Higher the exports, higher the investments which will increase the FDI of

country. Apart from this companies generally import items from other countries instead of producing to
avoid high cost and to avoid time constraints. In order to improve this sector companies need to focus on

more production side with better technology facilities to be used which will benefit the economy and will

result in higher exports. For this purpose Pakistan China project CPEC is playing an important role as its

investing in infrastructure which will benefit different industries.

On the other hand, agriculture sector plays an important role and has better future if proper resources and

technical facilities and new techniques provided to the farmers.

Power and Oil & Gas sector shows an increase since 2016 which is a positive sign for the economic

growth in Pakistan. Thar coal power plants after completion will cost eight cents per kilowatt hour. The

environmental impact from this project will be huge. For future financing in these projects government,

needs to use new technologies for better result.

Pakistan’s private capital markets are growing source of investment for foreign and local investors after

issuing new bonds, project financing and listing of companies. A more detailed and proper planning will

result in higher return which will attract foreign investors for future investments and financing. As there is

an impressive rise in foreign direct investment in Pakistan, but foreign direct investment remain

insufficient when we compared it with the other developing countries. In 2007, the capital inflow in

Pakistan was only 4% while in other developing countries it was 7.5% which was greater than Pakistan.

The primary reason why external direct investment was less active was the political environment, past

conflicts with foreign investors, insufficient resources, poor law and order in the state and terrorist threats

and attacks in Pakistan..

1.3 Research Objective

The basic objective of the research is to identify the relation between the different variables which are

chosen in the research paper and the significance of those variables in the short term or long term with the

use of the ADRL model.

l.2. LITERATURE REVIEW

Many researchers study the relationship of Foreign Direct-Investment and Gross

Domestic-Product and also with other variables. As we study almost twenty research papers for

making our model and for selecting our variables.

 (Arshad, 2012) He calculates the relationship between GDP, FDI and trade in Pakistan.

He took the data of forty years from 1965-2005. He applied auto regressive model and concluded

that both the exports and the imports of the country have Gross domestic product impact, but

Foreign Direct investment has no long-term impact on Gross domestic product.

(Falki, September 2009) She explores the role of FDI on economic development in

Pakistan. The other factors she had selected were labor force, national capital, and trade. She had

taken gross domestic-product as a dependent variable and other variables are taken as

independent variable in the model from 1980 to 2006. She implemented log on both sides of the

model. She used the Ordinary least square technique to conclude her outcomes and found that the

Foreign Direct-Investment has an adverse relationship with Gross Domestic-Product.

(Athukorala, November 2003) He compared the economy with the Srilanka and he said

that the increases in FDI will increase the GDP growth in progressive way. But in Srilanka

increase in FDI did not improves the GDP because of corruption, political instability, lack of

infrastructure, lack of good governance, lack of human capital.

(Hafiz Sohail Younus, April 2014) They also researched the effect of foreign direct

investment on Pakistan's economic growth. They were drawn from 2000-2010 information and

used the least square two-stage technique of concurrent equation assessment to conclude the

outcome. The other factors used are domestic investment, inflation rate. Finalize information that

were drawn from Pakistan State Bank (SBP). With the results they conclude that the GDP of

Pakistan and FDI of Pakistan have a good connection with each other. They therefore suggest

that the government focus on attracting international direct investment through appealing

strategies. Government will also concentrate on political stability and assure the country's

domestic investment.

(Hameedu, February 2014) Studied the Foreign Direct-Investment in the scenario of

India. He provided the information of foreign direct-investment in different sectors. He discussed

the inflow of FDI to know which had high share. He has taken the secondary data from different
source. He also try to find out the role and importance of FDI in India. He said that the inflow of

FDI in different sector like construction and development sector sustained high economic growth

and development because of the creation of job. Software & Hardware, computer and Drugs &

Pharmaceuticals were different sectors where there was high Foreign Direct Investors (FDI).

(Dr. Gaurav Agrawal, October 1, 2011 ) They checked the effect on the gross domestic

product of two foreign nations of foreign direct investment.. They compared the India and the

China. They takes the time period of 1993 to 2009. They applied Ordinary Least Square method.

They took GDP as the dependent-variable and four independent-variables. They found the result

that the increase in 1% of FDI would increase 0.07% in China’s GDP and increase 0.02% in

India’s GDP. They conclude that the China growth is more affected than the India growth.

(Amna Muhammad Gudaro, 2010) Studied the effect of foreign direct investment in

Pakistan. They are drawn from the era 1981-2010. They assess GDP development output and

Pakistan's FDI and CPI. They used the multiple regression model to assess the connection

between inflation, gross domestic product and foreign direct investment. The gross domestic

product was considered a dependent variable and foreign direct investment and the CPI was

considered an independent variable. They found that gross domestic product and foreign direct

investment are being linked progressively while gross domestic product and Consumer price

index are being linked negatively.

(Mutascu, 13 December 2010) They used panel data strategy to analyze the relationship

of Asian nations ' overseas direct investment and economic growth. They lasted the age from

1986 to 2008. The FDI has been discovered and imports can improve the country's development

cycle. They also said that labor and resources play a crucial part in Asian-country growth. They

were taken data of 23 Asian-countries and they concluded that the exports and FDI boost the

economy and capital and labor helped in this process.

(Dr. Nabila Asghar, 2011) Analyzed between the GDP and FDI from the period of 1983-

2008. They took data from World Development Indicator and from the World Bank of different
countries such as Pakistan, India, Maldives, Srilanka, Bangladesh, Japan, Nepal, Korea, China,

Philippines, Thailand, Malaysia and Indonesia. They took the variables GDP and FDI and they

applied IPS Test (Im. Pesaran and Shin) and LLC Test. They proved that GDP and FDI has

positive impact on economic growth.

(Minhas Akbar, May 25, 2015) He analyses the inflow of FDI on Pakistan from years of

2000-2013. They took foreign direct-investment, Gross domestic-product, terrorist attack regime,

political instability, domestic capital formation, foreign debt, degree of openness and exchange

rate as variables. They used multiple regressions as a model.

(Kaliappa Kalirajan, 28. May 2009) He studied the connection between FDI, exports and

GDP of different countries like Pakistan, India, Malaysia, Chile, Thailand and Mexico. They

collect data from World Bank, IMF, WDI, UNCTAD and International Financial Statistics from

the period 1970-2005. They used co-integration test and unit-root test to identify the result.

(Adeel Ahmad Dar) Inquired in their study that FDI and Economic Growth of Pakistan

have relation: Pakistan economy is divided into three sectors primary-sector, secondary-sector,

and territory-sector. These sectors include different organizations. The data has been gathered

from economic survey and also from State Bank of Pakistan (SBP). The data are taken from the

years 1997 to 2013. The statistical tool used in the study is Vector Error Correction Model

(VECM), with panel co-integration. The result of the study suggests that the short run

relationship between, foreign direct investment and economic growth is favorable while there is

no co-integration in the long run. They used following variables in research GDP, FDI, Domestic

investment (DI), Human Capital, Institution and Infrastructure.

(Dr. Najia Saqib, 2013) They discussed effect of foreign direct-investment on the

economic growth of Pakistan. The data they were taken from the year 1991-2010. The statistical

test were used in the study is Augmented Dickey Fuller Test to checked the long run effect of

foreign direct-investment on economic growth. Beside it four more variables were used Trade,
inflation Domestic-investment and Debt. In the study they suggested that only domestic-

investment is useful for country and while Debt, Trade and Inflation have adverse impact.

(S. M. Zahidur Rahman, 2015 ) Study the Impact of macroeconomic on foreign direct-

investment in SAARC countries. Data for the study has been taken from the year 2002-2012.

They took data from websites of international monetary fund and World Bank. They took data of

seven Asian-countries. Bangladesh, Srilanka, India, Bhutan, Nepal, Pakistan and Maldives. The

method used in this study is correlation and simple regression method. Variables used FDI, GDP,

Inflation, Total Foreign exchange reserves and Gross capital formation.

(Rahman, January 25, 2015) Analyzes the effect of foreign direct investment on

development in Bangladesh. He researched the connection between foreign direct investment and

macroeconomic components such as gross domestic product, inflation rate and trade balance

(BOT). He drew information from 1999-2013 and implemented the Multiple Regression

Analysis and according to his research there was a negative relationship between foreign direct

investment and economic growth.

(Zeeshan Atique) Studied the FDI on Pakistan's development. His finding promotes the

hypothesis of Bhagwati. He adopted five factors of GDP, foreign direct investment, labor force,

education spending, capital formation, and import+ export. The information (1970 t0 2001) were

gathered from the State Bank and World Development.

(Levine, May, 2002 ) Analyses the relationship between the foreign direct-investment

and economic growth. They used OLS regression from 1960 to 1995. The variables are FDI,

Growth, CONDITIONING SET and GDP.

(Ramzan, March 2013) The main objective behind the study was to compare export to

import and development through FDI in Pakistan as well as GDP growth in Pakistan. They

collected information from 1976 to 2010 for research and implemented the Auto-Regressive

Distributed Lag (ARDL) model. They collected data from World-Development Indicator and the

variables were GDP (Dependent), exports (Independent) and FDI (Independent). They found that
there was no long-term relationship between gross domestic product, exports, and foreign direct

investment, but there was a short-term relationship between GDP, exports, and FDI.

(Haddad, February 24, 2016) He researched the impact of foreign direct investment on

Jordan's economic growth and unemployment. He drew the 1998 era information from 2014. He

used the technique of OLS. He chose unemployment rate (UR) and economic growth (EG) as

binding variable and FDI as independent variable. He determined that the 1% fold rise in foreign

direct investment reduces the unemployment rate (0.009 percent) and increases 1.219% fold in

Jordan GDP.

(Muhammad Tahir, June 15) They regarded the relationship between foreign direct

investment, overseas remittances, and international imports to Pakistan's economic growth. They

took the data for his study from 1977 from 2013 as well as, they apply ARDL model. They

recognize GDP as independent-variable and external remittances, foreign direct-investment and

imports as independent-variables. They were taken the data from different sources. He concluded

that the FDI and foreign remittances had progressive role in economic-growth while foreign

import had negatively effect on the economic-growth of Pakistan. Moreover, they conclude that

the imports can negatively effect on the economic-growth of Pakistan. They suggested that

policymakers develop appealing measures to increase the country's overseas direct investment

inflow.

(Najabat Ali and Hamid Hussain) Both researchers convey their thoughts on the effect of

foreign direct investment on Pakistan's economic growth. Foreign direct investment performs a

significant part in a country's development. It is the main variable in creating countries ' financial

development. From 1991 to 2015, they collected information from the time sequence. They use

correlation technique and multi regression technique for data analysis. Their outcome

demonstrates beneficial effect of foreign direct investment on Pakistan's economic growth.

According to their results, they indicate that the state of Pakistan should adopt some measures to

boost foreign direct investment in Pakistan.

 (Zia Ur Rahman 2014) The primary aim of this study is to define the impact of foreign

direct investment on Pakistan's GDP. He requires information from the 1981-2010 World Bank.

His research model is Gross Domestic Product as dependent variable and Foreign Direct

Investment and Consumer Price Index as independent variables. He uses the method of multi-

regression to figure out outcomes. GDP and FDI have a favorable connection, but GDP has an

adverse connection with CPI, according to the outcomes. It demonstrates that GDP will rise with

the rise in FDI.

(Syed Shahbaz Hussain) Foreign capital inflows assist many developing nations to

develop and also assist fast development advance. This study shows the effects of capital inflows

from developed countries on GDP of Pakistan. He utilize time series data of past 30years. He

takes data from year 1985-2013. Dependent variable is GDP and independent variables are FDI,

External Debt, official development assistance and Worker remittances. For determining the

stationary of variable is he uses two techniques Augmented Dicky Fuller and Philips Perren. The

result shows that FDI and Work remittances have favorable impact on Growth. Foreign aid and

external debt are not affecting positively towards growth. After reading different policies in his

study, he suggests that made policies which utilize positively the capital inflows and lead to the

development of the country.

3. METHODOLOGY

The main reason for this research is to identify the relation of Foreign Direct Investment

with the other variable taken in this report. To analyze this relation we are using Auto-regressive

distributed lag model (ADRL). In this research we examines the time series data of twenty-seven

years from 1990 till 2017. We have taken FDI (Foreign Direct Investment) as a dependent

variable and GDP (Gross Domestic Product), DI (Domestic Investment), TO (Trade Openness)

and inflation as independent variables.

 3.1 Auto- regressive distributed lag model

Using ADRL given exam, the current research examines the short-term and long-term

connection between FDI and other factors. First, the ADRL assessment method is helpful

regardless of the static status of selected factors in the model and allows them to take inferences

on long-term interventions. This method can be used irrespective of the sequence I (0) or I (1) or

marginally incorporated.

3.2 Nature of research

The approach of our study is quantitative in nature. In the study, we use numerical

information collected from various locations. After collecting information, we will evaluate this

over statistical instrument to find out our outcomes. This research statistics can be collected from

secondary- source. Secondary source or secondary data mean that acquiring data from websites

or prominent publish sources.

3.3 Data Collection

Figures for this study are gather from different sources. The data are consist of twenty-

seven years. The period will comprise from 1990 to 2017.

Table 3.

Variables Data Source

.Foreign Direct Investment. W.B D.V
.Gross Domestic Product. W.B I.V
.Inflation W.B I.V
.Trade openness. Global Economy I.V
.Domestic Investment W.B I.V

3.4 Research Method

The method taken for this study is the use of the Auto-regressive distributed lag model

(ADRL). The model will be regressed to discover the outcomes and lastly findings will be

concluded.
3.5 Conceptual Framework

The study's conceptual framework is to attempt to define the factors used in the research

articles. The conceptual framework uses statistical instruments to examine the information by

implementing the model and analyzing it. Our components of research can be divide in two well-

known groups of variables specifically dependent-variable and independent-variables.

3.5.1 Dependent Variable

Foreign Direct-Investment is only one dependent-variable in the research paper.

3.5.2 Independent Variable

The study article contains four independent factors, namely GDP, Domestic- investment,

and inflation and the trade- openness.

Gross Domestic- Product

Domestic Investment
Foreign Direct- Investment

Inflation.

Trade- Openness.

3.7 Model of the Study

The equation which is used as the model in the study is:

FDII =GDP + DI + INF + TO + C

Where:

FDII = Foreign Direct- Investment

GDP = Gross Domestic- Product

DI = Domestic- investment

INF= Inflation.
 T0 = Trade openness

C = the constant term

3.8 Explanation of Variables

3.8.1 Gross Domestic- Product

Gross Domestic- Product is the totality of all financial assets that work in a nation. GDP

calculates the financial operations conducted in an economy. It plugs the market value of goods

and services that are available within the geographical limits of an economy for the numerous

period of time. It is further split into the primary segment, secondary segment and tertiary

sections. Each section consists of a varied economic group. The primary section involves

products from meat, sugar, drinks, smoking, fabric, rubber and leather. Secondary sector involves

chemicals and petro components and petroleum purification, pharmaceuticals and fertilizers,

cement, fundamental metals, metal products, machinery other than electrical, electrical

machinery, electronics, energy, manufacturing and mining and quarrying with oil and gas

exploration, transportation equipment. Tertiary segment includes financial businesses, transport,

tourism, storage and communication, wholesale and retail, social and private services.

Components of GDP

There are following four components of gross domestic- product:

• Personal consumption.

• Business investment.

• Government spending.

• Net exports.

Formula for calculating components of Gross domestic product is Y = C) Consumption +

I), Investment + G), Government spending + NX), Net exports.

Net export is derived from import-export.

Personal Consumption
 Personal consumption expenditure is also known as private consumption expenditure. It

calculates domestic consumption intakes. It gives information about how much money a country

spend on goods and services. Goods area is divided in to two sub-groups. Consumer durable

goods includes long lasting items, such as automobile, house-hold goods (furniture, consumer

electronics, Home appliances, tools), medical equipment, sports equipment, jewelry, books, toys.

Non-durable goods are fast moving consumer goods. It involves those items that use quickly in

homes. Non-durable goods includes food, fuel, cigarettes, cosmetics and cleaning products,

clothing, rubber, textile, footwear, medicines, office supplies, storage and containers, fabric and

plastic goods and personal products. Services are functions of businesses. Services are providing

by governments, non-profit groups and also other businesses. Examples related to services are

dry cleaners, transporters, yard maintenance and financial services. According to the measure of

gross domestic product 70% of economic output is lift from personal consumption. Personal

consumption is known as the basic economic indicator. It is the primary force that drives

economic growth. Personal consumption is a key component of GDP.

Business Investment

Business investments are the investments that companies buying for producing consumer

goods. In some instances, purchasing by businesses are not included in business investment.

Purchase made for replacement of existing item is not counted because it does not add to GDP.

Only those purchases are counted which are made for creating new consumer goods.

Government spending

Government expenditure refers to the currency used by the government section on the

acquisition of products and facilities such as healthcare, education, defense and social protection.

When govt buys products or facilities for current use and intends to meet the different general

demands immediately. This government spending is referred to as stopping government spending

on national income accounting.

 When the state wishes to buy products or facilities for potential consumption, it is called

government investment in national income accounting. It involves public investment and

government consumption, and transfer payments comprise of transfers of revenue.

Sources of Government Expenditure,

Government expenditure is funded from two sources:

1. Tax gathering from the public by the government

Direct tax.

Indirect tax.

2. Government borrowing.

Borrowing cash from own populations

Borrowing cash from foreigners

Net exports of goods or services

The country's net revenues originate from when the complete sales price is less than the

complete import price. It can be used in an open economy to assess the expenditure of the entire

country or gross domestic product. In other words, net exports equal to the amount by which

foreign countries spend on the goods or services of a host country exceed the trade payments of

the home country overseas goods or services.

Net exports are calculated through a formula total exports minus total imports. It is the

value of total exports of nation.

3.8.2 Foreign Direct- Investment

Foreign Direct- Investment is well- defined as investment in one country done by the

investors of other nations. It expand the net worth of the country. Investment that are made by

investors are under their managerial control (Graham 1995). From the preceding 20 years foreign

direct investment has exponentially growth its capacity in worldwide. Particularly in Asian-

nations, South- Asia, East- Asia, and Southeast- Asia. Investors give greater hand to Asia for

investment destination. The main purpose of foreign direct- investment in emerging countries is
to increase the local capital which helps to rise economic- growth of emerging nations and also

help in maintaining least level of foreign capital. (Hafiz Sohail Younus, April 2014)

Types of Foreign direct- investment

Foreign direct- investment can be further categorized in to five different parts.

• Green field investment.

-

• Merger or Acquisition.
.

• Joint venture.

• Horizontal foreign direct- investment

• Vertical foreign direct- investment

Green field investment

-

It is the type of foreign direct- investment in which a parent business invest a subsidiary

in different nation. Green field investment is starting by creating new services or advancing

existing services. The Installation of plants and generating fruitful opportunities for exports i.e.

export processing zone is finest example of Green Field Investment.

Merger and Acquisition

.

A merger or acquisition takes position when the current products are purchased by a

foreign business or business from an indigenous business or corporation. The Pakistani business

Dawlance, which is a significant household appliances company, is its finest instance,

subsequently it is a Pakistani corporation but is now purchased by Istanbul Arçelik's foreign

business.

Joint venture

Joint venture starts when overseas Company connects and operate works with a local

company to form a corporate entity. Joint venture is dissimilar form partnership because it has

certain end and it works on a single project. Suzuki motor of Pakistan is the example of joint

venture it was built when joint venture is started between Pakistan Automobile Corporation and

Suzuki Corporation.
 Horizontal foreign direct- investment

Horizontal Foreign direct investment is described as when a company in another nation

invests in the same sort of industry as they do at home. The Toyota Japan motors are the finest

illustration of horizontal foreign direct investment investing in the automotive sector in Pakistan.

Vertical foreign direct- investment

Vertical foreign direct investment is spread in two parts. Backward and forward vertical

foreign direct investment.

• Backward Vertical FDI: It includes funding in a sector or industry that provides

input into the national manufacturing of the funding firm.

• Forward Vertical FDI: This is the type of vertical foreign direct- investment in
.

which investing in an industry which trades the output of its local production.

3.8.3 Inflation

An expansion in money supply or rise in overall price level is known as inflation. When

level of price increases, it results decrease in buying power. Rise in general price level decrease

the value of currency of a country. Inflation is divided in to different types.

1. Deflation: A decrease in overall price level is termed as deflation.

2. Disinflation: Disinflation is defined as decline in the level of inflation.

3. Hyper-inflation: It is an uncontrollable inflationary coil.

4. Stagflation: An increase in general price level, slow financial growth and high

unemployment are collectively called stagflation.

3.8.4 Trade Openness

Trade openness gives chance to trade between different countries. It includes import,

export, lending, borrowing and remittances. Trade openness helps in economic growth and had a

positive impact on FDI. It also creates a healthy competition between countries.

 Trade openness helps in achieving positive and higher FDI by creating employment

opportunities, reducing poverty, and better income distribution, progress in income and higher

Gross domestic- product, especially in developing countries.

Trade Openness gives nations an opportunity for import and export in many other parts of

the world, which leads to higher economic development, and also helps in getting indication

about new technological advancement. Trade is an important mode which allows countries to

allocate their resources efficiently and allows the spreading of knowledge and use of advance

technology to match the international market side.

Trade includes import and export of goods. The export part helps in remitting funds from out of

the country which is beneficial in economic growth revenue and it will also increase the country

reserves. Whereas importing results in higher tariff rates and tax rates which is another positive

thing for economy to generate funds. Import is a backbone of any country as it will allow

countries to import goods which are not produced in their home country efficiently. To maintain

a balance trade position in country value of import should not exceed cost of exports.

Trade openness is calculated as follows:

Trade Openness = Exports + Imports of goods or services

Gross domestic- product
Overall, trade openness has an adverse effect on economic growth and FDI with adequate

resource allocation, employment opportunities and the introduction of fresh sophisticated

technology with rise in production.

3.8.5 Domestic Investments

Domestic Investments mainly characterizes original and prevailing resources used by

households, private firm plus government organizations. While calculating DI with FDI and GDP

it ignores disposal of Fixed Assets surrounded by an economy and focuses on land value and

excludes all sort of mineral and subsoil assets.

Inflow of investments in developing countries is increased gradually in developing

countries. To attract private foreign capital both domestic, private and public investments plays a
crucial role. Inflow of funds in a country helps in creating a positive balance of payments,

increases, reserves and increases economic growth. Inflow of investments also helps in

strengthening the PKR value in Pakistan as PKR value will appreciate and it will strengthen our

currency value in global market.

Domestic investments can also be improved by providing high public investment and

proper infrastructure which will in return creates employment and increases economic income.

Studies suggest that higher the domestic investment higher the capital returns which will

eventually benefits the economy and will positively impact on FDI.

Higher domestic investments will open doors for foreign investors to invest in Pakistan

which will benefit many industries. As a result more employment will be generated, inflation and

GDP will be improved which will ultimately paybacks the economy of Pakistan and most

importantly it will positively impact on FDI.

CHAPTER NO 04

RESULT

The strategy Autoregressive Lag used to discover the outcomes of our research. We take

lags of up to 2 in our study for capturing significant results. We also conduct long and short run

analysis through Auto-regressive distributed lag model (ARDL) approach to show link of our
.

study variables.

4.1 Unit root test

Table 4. The unit root test of augmented dickey-fuller and Phillips-Perron

VARIABLES. Augmented Dickey- Fuller. Phillips- Perron.

At level. With first difference At level. With first difference
(Prob. Value) (Prob. Value) (Prob. Value) (Prob. Value)
Foreign Direct 0.0777 0.0217 0.2497 0.0200
Investment
Gross Domestic 0.0090 0.0000 0.0336 0.0000
Product
Domestic 0.7909 0.0052 0.7278 0.0052
Investment
Inflation 0.0013 0.0000 0.0013 0.0001
Trade Openness 0.4963 0.0000 0.4963 0.0000
 Before testing the relationship between the dependent variable and independent variables,

we first evaluate the stationary of the data. We use an augmented dickey fuller test and Philips-

perron test to check the stationary of the information. We see the outcomes of Phillips- perron

and augmented dickey fuller test in Table 4. The level of significance is 5 percent to verify the

stationary of the information. From the table we easily identify that some of the variables are

significant at level but some are significant on the first level of difference.

4.2 Correlation analysis

Table 5. Correlation between the variables

FDI DI GDP INF TO

1 0.581275 0.098435 0.149440 0.191605
0.581275 1 0.088988 0.222712 0.538732
0.098435 0.088988 1 -0.188431 -0.106064
0.149440 0.222712 -0.188431 1 0.228317
0.191605 0.538732 -0.106064 0.228317 1
As in the table we see the correlation between the variable as if there is rise in FDI with 1

so all the other variable can be change positively, as if there is rise in DI with 1 so also there is a

positive change in all other variable. If GDP is rise by 1 so FDI and DI has change positively, but

there is an adverse change in INF and TO. If INF is rise by 1 so FDI, DI and TO can change

positively, but there is an adverse change in GDP. If there is 1 change in TO, there will be a

beneficial change in FDI, DI and inflation, but there will be an adverse change in GDP.

4.3 Auto-regressive distributed lag model (ADRL) Results

Table 6. Result of ADRL model

Variables Coefficients T statistics Prob.

DI 0.054241 2.494117 0.0240
GDP 0.155064 3.142937 0.0063
GDP (-1) 0.136341 3.052245 0.0076
GDP (-2) 0.090883 2.080381 0.0539
INF -0.009857 -0.792856 0.4395
INF (-1) 0.029877 2.235377 0.0400
INF (-2) 0.053394 3.277205 0.0047
TO -0.044394 -1.660020 0.1164
C -1.660343 -2.565641 0.0207

R-square 0.913008
F-statistics 18.65836
Durban-Watson stat 1.677323
4.3.1 Coefficients

The coefficients show association among independent and dependent variables. In our

study variables as shown in table no. The independent variable domestic investment (DI) shows

that I unit change in DI will bring 0.0542 positive change in FDI. Gross domestic Product (GDP)

in all three levels shows positive change as shown in table accordingly i.e. 0.155, 0.138 and

0.090 which means that I unit change in GDP will bring above mentioned positive change in

FDI. Inflation without lag effect show adverse relationship between inflation and FDI. -0.009

change in FDI due to change in 1 unit of Inflation, it means that inflation do not show significant

response during current FDI. While after lag, i.e. first lag and second lag shows positive

relationship, at first lag 0.029 and at second lag 0.053. It means that 1 unit change in inflation at

lags will cause mentioned changes in inflation, i.e. first lag 0.029 and second lag 0.053 trade

openness relation is also negative, which means that 1 unit change in trade openness cause -

0.044 change in FDI.

4.3.2 T-statistics

Over all mostly variables of our study are significant except few variables. Domestic

investment, GDP, inflation after lags are significant in study. Trade openness in the study is

insignificant. Trade openness insignificance is due that trade openness shows balances of export

and import which are component of current account. While FDI is component of capital account.

That is the reason why both have insignificance result.

4.3.3 R Square

R square demonstrates model fit goodness as to how much model is appropriate in the

research. R square value is 0.913, which means the model is fit in the research. The value of R

square above 80 implies that the value of R square is correct and the model is fit.
4.3.4 F Statistics

It demonstrates model's general significance. And the findings of our research show that

overall model is significant. In our research, the value of f statistics is 18.65, which implies that

the overall is significant.

4.3.5 Durbin Watson

DW shows if there is autocorrelation in the model or not. In our study, we can say that

autocorrelation do not persist as value is 1.67 as shown in table. It varies from 0 to 4 value of 2

regarded without ideal autocorrelation. In addition, according to known author Damodar N

Gujarati, if the value of Durbin Watson ranges from 1.5 to 2.5 without autocorrelation, so in our

study, we may say that there is no autocorrelation.

4.3.6 Multi co-linearity

Our research study also do not have multi co-linearity as mostly our variables t-statistics

are significant as well as our r square is high. So we can say that our study have no multi co-

linearity.

4.4 Long run and short run relationship

Table 7. Long Run Co efficient

Variable Co efficient Std. Error t-Statistic Prob.

DI 0.147249 0.055671 2.644981 0.0176

GDP 1.037812 0.314763 3.297122 0.0045

INF 0.199299 0.084793 2.350423 0.0319

TO -0.120518 0.071620 -1.682738 0.1118

C -4.507386 2.178132 -2.069381 0.0551

In Auto-regressive distributed lag model (ARDL) approach, we also establish short and

long run relationship among variables. In short run inflation and trade openness are insignificant

in short run while other variables GDP, domestic investment and inflation after lag are

significant.
 While in long run all variables are significant except trade openness which is

insignificant. From this short and long run analysis, we can say that except trade openness, other

variables are substantial in short and long run both.

4.6 Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-STATISTICS 1.576809 PROB. F(9,16) 0.2045

OBS*R-SQUARED 12.22119 PROB. CHI-SQUARE (9) 0.2011
SCALED 5.324961 PROB. CHI-SQUARE (9) 0.8051
EXPLAINED SS
The probability of the given test is 0.2045 which is greater than 5% so we can say this

thing that the Heteroscedasticity is not exist in the given study.

CHAPTER NO: 05

CONCLUSION

As we see in this document, there is a significant relationship between Foreign Direct

Investment and the Gross Domestic Product in Pakistan so that we can say that FDI can play an

important part in the growth of our economy, using time- series data to identify the relation and

Pakistan is taken as a case of study. The data of 1990 till 2017 shows that there is a constructive

relation between all variables except trade openness. Foreign direct- investment (FDI) is the key

for the growth of economy. So the government and the policy makers should be focusing more

on improving the infrastructure of the country. As there is a constructive relation among foreign

direct- investment and domestic investment so we can approximate that if overseas investment in

the country can increase so domestic investment can also be increase.

With an important role in an economy government tries it best to improve FDI which will

affect the economy growth and future investment. With new policies and initiates many big firms

from different countries are investing in Pakistan which will increase the employment rate. Some

of the examples are CPEC agreement with China, British Airways started its flight operations in

Pakistan and PIA announced to resume its flight operations to Tokyo.

With the increase in dollar prices and hike in inflation, petrol prices and interest rate our

government needs to take serious measure to control the GDP and economy growth by
introducing different investment plans which will create opportunities for exporters and big

international firms to invest in Pakistan.

Pakistan should promote domestic investment to boost growth rather than rely

exclusively on foreign direct investment as the prime mover of the nation's economy. Pakistan

should create a foreign direct investment code of behavior to limit its restrictive practices of

business, limit its relocation of revenues from Pakistan, and guarantee that important parts of its

revenues are reinvested in the Pakistan economy. Furthermore, the Pakistani government also

focuses on establishing a stable government to attract foreign people(investors) to invest in the

economy so that investors can invest more in the economy.

RECOMMENDATION

In order to further improve the economy situation, some of the recommendations are as

follows:

1. With the new government and policies in place new tax plans must be implemented at all

class levels depending on their income level.

2. In order to increase the trade opportunities between different countries import and custom

duties should be improved in order to promote import and export of items. Lower prices will

help in importing more goods which are not available in Pakistan and this will increase the

production services. These policies should help in achieving balance of trade should be

achieved.

3. With the hike in interest rate chances of new investments to be made in the country which

will increase the employment opportunities.

4. Projects like CPEC, metro lines, oil line are already in progress and similar projects should

be introduced more to increase the economy growth which will positively impact the FDI and

employment rate in country.

5. With the increase in technological advancement, new technologies, equipment’s should be

introduced which will help firms to improve their production and improve their quality of

goods.

6. Further government should improve the power shortage issues in order to improve the

production of goods quality.

 Tables

Annex 1

Table A1 the data of study

Year FDI as % of GDP as INF DI

GDP
1990 0.613 4.459 6.452 24.157
1991 0.569 5.062 13.061 22.322
1992 0.692 7.706 10.057 23.617
1993 0.677 1.758 8.696 24.552
1994 0.811 3.737 12.889 24.006
1995 1.192 4.963 13.875 24.207
1996 1.456 4.847 8.374 24.694
1997 1.147 1.014 13.384 25
1998 0.814 2.55 7.526 25.114
1999 0.845 3.66 5.862 25.474
2000 0.416 4.26 24.891 22.336
2001 0.523 1.982 7.891 21.776
2002 1.142 3.224 2.463 21.674
2003 0.641 4.846 4.438 24.597
2004 1.141 7.369 7.749 28.736
2005 2.01 7.667 7.026 28.646
2006 3.113 6.178 19.052 26.85
2007 3.668 4.833 7.274 27.843
2008 3.197 1.701 13.204 28.734
2009 1.39 2.832 20.667 22.723
2010 1.14 1.607 10.85 21.413
2011 0.621 2.748 19.645 18.126
2012 0.383 3.507 5.969 16.94
2013 0.577 4.396 6.966 16.116
2014 0.764 4.675 7.412 15.589
2015 0.599 4.731 4.11 15.386
2016 0.893 5.527 0.4 16.525
2017 0.923 5.701 4.001 17.034