What Drives Bilateral Foreign Investment Flows to Pakistan? An Application of Newton Gravity Model

Abstract

Foreign investment flows are translated into capital intensive and technically state-of-the-art industrial sectors and resultantly accelerate the intra-firm and intra-industry trade in the world. This study is an attempt to investigate the determinants of bilateral foreign investment flows to Pakistan by disaggregating the bilateral foreign investment flows into bilateral foreign direct investment flows and bilateral foreign portfolio investment flows through an application of gravity model from 1995-2017. The study confirms the findings of the foreign investment-gravity model for Pakistan. The results indicate that the income of the host country and investing country have a positive bearing on all bilateral foreign investment flows while the population of the host country and source country along with geographical distance turn out with negative sign by validating the traditional gravity model. In the modified gravity model, language, colony, and area dummies have shown a positive association with bilateral foreign investment flows while terrorism appears with a negative sign. The study points out Pakistan can gain benefits by facilitating capital movements in source countries.