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ijcrb.webs.com INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Determinants of Foreign Direct investment and its impact on GDP Growth in Pakistan Prof. Dr. Ch. Abdul Rehman Rector Superior University, Lahore Orangzab Mphil student. Superior University Lahore. Ali Raza Mphil Student. Superior University Lahore. Abstract The purpose of this article is to identify the determinants of Foreign Direct investment and its impact on GDP growth in Pakistan. In this research we will use secondary data about FDI and their Determinants. To investigate the impact of FDI on GDP & Determinants of FDI different statistical tests are applied on the data collected over the period of 1975-2008. This study present positive and significant impact of Foreign Direct investment on GDP of Pakistan. Furthermore, the results indicate that market size, trade openness / access to international market and Quality of labor are the major determinants that have significant affect on the FDI inflow. The study found no affect of market potential and communication facility on the attraction of FDI inflow in Pakistan.There are some other determinants which may have significant impact on inflow of FDI but we not consider that determinants because of unavailability of data and results shows that Access to international Market have negative impact on FDI inflow in Pakistan so additional research is needed to explore this negative impact. Keywords: Foreign Direct Investment, Determinants, Growth, Pakistan. 1. Introduction Foreign Direct investment play very important role in Economic development of both developed and developing countries. Through FDI not only Technology but also skilled management transferred to the host country. FDI help to increase the productivity by using latest technology which also helps to increase the export of the country. New job opportunities are created which help to reduce the poverty, and also bring financial development in the recipient country. That‘s why every country makes changes in their economic policies and tries to attract FDI inflow in their country. The objective of this study is to identify major determinants of FDI and the impact of FDI on economic growth. We use Market size, market potential, Access to international market, quality of labor and communication facilities as independent variables to identify which variable has significant impact on the attraction of FDI inflow. The remaining paper is organized as follows. Section 2 describe the literature review, section 3 present the research questions who‘s answers are identify in this paper, section 4 discuss the data source and methodology and also present the model which is used in this paper, empirical results are discussed in section 5 and conclusion in section 6. COPY RIGHT © 2011 Institute of Interdisciplinary Business Research 198 JANUARY 2011 VOL 2, NO 9 Listed in ULRICH’S
ijcrb.webs.com INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS 2. Literature Review There are lots of studies that have determined the major factors that affect on inflow of Foreign Direct Investment and the impact of Foreign Direct Investment on economic growth. Better infrastructure facilities, Market potentials and Market size positively effect Foreign Direct investment inflow. On the other hand high cost of start-up business and unfriendly business environment discourage FDI inflow in the developing countries (Mottaleb at el. 2008). Market size, Labor costs and exchange rate factors are important variables in determining location choices of direct investors (O‘Sulliva. 1985, Pan-long Tsai. 1994). Democratic Government as a very important determinant of FDI Democratic government attract high level of investment because in democratic country there is low country risk and Debt risk also which encourage the investor to invest in that country. The country where there is Democratic government attracts 70% more FDI then authoritarian regimes (Jensen, N. M. 2003). Political instability is also an important determinant of FDI. If we consider only political instability it offer distorted picture of reality so other factors such as income inequality, social welfare, history, location, experience with democracy, the relationship with superpowers, the countries' infrastructure, membership in World institutions such as International Monetary Fund, and other related factors should be carefully examine. Return on investment is also very important determinant when there is political risk the investors may not decrease or withdraw their funds because of the expected return on investment. Keeping this in mind, the investigation of the relationship between political risk and the flow of FDI without accounting for the return on investment would be incomplete. Therefore, expected or actual rate of return on investment should be somehow incorporated into the analysis (Fatehi-Sedeh at el.1989). In the presence of financial and political corruption FDI develop the financial markets which bring financial development in developing countries (Kholdy at el. 2008). Weather a country is following the import substituting (IS) or Export promoting (EP) strategies the volume and efficiency of FDI inward also vary accordingly. FDI is likely to be much more efficient in promoting growth in Export promotion (EP) countries because it is operating in suitable environment. So FDI is more growth enhancing factor in EP countries then IS countries (Balasubramanyam et al. 1996). Beside the local conditions and policies of the country the sector in which Foreign Direct Investment is invested is also very important. Flow of FDI into different sector likely (services, primary and manufacturing) produces different effect on economic growth. Flow of FDI into service sector has ambiguous effect. It has negative effect on growth if it is invested into primary sector, where as the effect is positive if it is invested into manufacturing sector (Laura, A. 2003). Developed countries attract more FDI as compared to developing countries. According to UNCTAD (2007) there was total 945.8 billion USD flow of FDI in the world in 2005. Out of which, only amounted 314.3 billion US$ which was remained only 38.6 % of entire Foreign Direct investment received by developing countries whereas 590.3 billion US$ received by developed countries which is 62.4 % of total Foreign Direct Investment in the same year. According to the UNCTAD (2007) report low-Middle income COPY RIGHT © 2011 Institute of Interdisciplinary Business Research 199 JANUARY 2011 VOL 2, NO 9
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