IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH: A TIME SERIES ANALYSIS OF PAKISTAN

Abstract

The study aims to determine the relationship between foreign direct investment and economic growth in the case of Pakistan by using the annual data from 1973-2021. The three independent variables are foreign direct investment, inflation, and trade while gross domestic product (GDP) is the dependent variable. The unit root test results explore that all variables are integrated at first difference. The Johansen cointegration technique examines both short- and long-term relationships. The study found log run as well as short run relationship among variables. All variables are integrated at first difference, based on the outcomes of the first unit root test. The Johansen cointegration method is used to investigate both the short-term and long-term connections. The findings suggest that while inflation negatively correlates with GDP, trade and foreign direct investment have a favorable (positive) effect on economic expansion. The policy recommendation is that only some foreign investment sectors benefit Pakistan's economy due to the different characteristics of developing and developed countries. The Government may give incentives to foreign investors, give cheap raw materials, and make better economic policies that are fruitful for foreign investors. The Government may reduce the taxes directly and indirectly and give subsidies. 

Keywords: Economic Growth, Inflation, Trade, FDI