Determinants of Foreign Direct Investment: Evidence from Pakistan

Abstract

This study has analyzed the determinants of foreign direct investment in Pakistan. The determinants have been examined are GDP per capita, Labor Force, Openness, and Tax on International Trade. The proposed quantitative study is to examine the long run as well as short run relationship between macroeconomic factors and Foreign Direct Investment inflow using Johansen Co-integration approach on the time series data of Pakistan from 1975 to 2005. The findings of the study show that the gross domestic product per capita has positive and insignificant effect on foreign direct investment in short run if other factors remain unchanged. The coefficient of labor force and taxes on international trade is positively associated with FDI and this relation is statistically insignificant in short run analysis. The coefficient of openness shows that it has negative and statistically insignificant impact on FDI in short run analysis. The coefficient gross domestic product per capita has positive and insignificant effect on foreign direct investment in long run and the coefficient of labor force is positively associated with FDI and this relation is statistically insignificant in long run analysis. The coefficient openness has positive and significant effect on foreign direct investment in long run. The coefficient of tax on international trade is negatively associated with FDI and this relation is statistically significant in long run analysis. Therefore, the policy makers should specially focus on developing the better levels of openness and reduction of tax on international trade.