Motivating Factors of Fdi in Pakistan

Topics: Economic growth, Macroeconomics, Investment Pages: 8 (2217 words) Published: June 12, 2013
Motivating factors of foreign direct investment in
Purpose – the influence of market size and growth to attract FDI has been examined. Methodology/approach – This paper investigates whether FDI motivators affect FDI based on time series data for Pakistan covering period from 1988-2011. Findings – The result of the study indicate positive and significant relationship between FDI and market size and between FDI and growth rate. Originality/value – The basic contribution of this study is to help identify the main FDI determinants .Another Contribution of this study can be mannered as, it is going to direct investors in evaluating the importance of market size and growth rate while making decisions to FDI in Pakistan. It will also contribute by providing with the information regarding the relation between market size , growth rate and FDI. Keywords: foreign direct investment, growth rate, inflation, time series data, Pakistan

In last few decades extensive FDI inflows have been seen in developing countries. Developing countries compete to attract FDI. Primary restrictions in the way of FDI have been removed as the importance of fdi has been recognized. FDI is considered a long term source of capital and advanced technologies. . FDI is going to be the strongest tool for the measurement of globalization strength of a country. In addition to this foreign investors bring world’s best management practices. As a result of FDI more and more industries are setup in host countries increasing employment opportunities there. FDI is acting as a key mechanism to eliminate TGAP (technological gap) between developing and developed countries. FDI also promotes international trade.FDI is considered most powerful way of transforming traditional economies into modern economies. China, India and Korea are best examples of these transformed economies. Many studies have been conducted to study various factors that can whether directly or indirectly are influencing FDI. Pakistan is an important country in south Asia. Increasing BOP difficulties and reduction in aids have forced developing countries like Pakistan to rely on FDI. “In developing countries like Pakistan utilization of resources is considered impossible due to scarcity of domestic capitals.Despite terrorism and many other problems 74% of investors who already had invested in Pakistan are interesting to continue to invest in Pakistan. In Pakistan investors can hold 100% of equity in agriculture, industrial and service sector. Being a capital-deficit country, Pakistan needs FDI. From late 1990s the Government of Pakistan has established a number of policies to attract FDI. For example, the requirement of Government approval for foreign investment has been removed and 100 percent of ownership by foreigners is allowed. Foreign investment is prohibited in the area of agricultural land, forestry, irrigation, real estate, insurance, health and related services. In the petroleum sector, the government has enacted a new petroleum policy which is significantly conducive for foreign investment. People having Pakistani nationality whether living in or our of geographical boundaries of Pakistan and foreigners are now allowed to bring, carry and take out foreign currency, open accounts and hold certificates in foreign currency. Export incentives have been broadened.(khan 2010) For econometric analysis data ranging from 1988-2011 has been taken from WDI (World Development Indicator). Linear regression and ordinary least square techniques of estimation has been used. Software Stata has been used for deriving results The results of previous studies were estimated from panel data. The data used in this study are annual from the years 1986 to 2011.In some previous studies Multiple proxies have been used for dependent variable but for this study only one proxy for dependent variable is used.(Sethi 2003). Many scholars have studied market size, profitability,...

References: Aqeel, A., & Nishat,M. (2004). "The determinants of foreign direct investment in Pakistan." The Pakistan Development Review 43(4): 651–664.
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