determinants of foreign direct investnment
TRANSCRIPT
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DETERMINANTS OF FOREIGN DIRECT INVESTNMENT
& ITS IMPACT ON ECONOMY OF PAKISTAN
By
FARMAN ALI
Roll. No. 454
Thesis submitted in partial fulfillment of
The requirements for the degree of
BS (BANKING & FINANCE)
DEPARTMENT OF BANKING AND FINANCE
GC UNIVERSITY, FAISALABAD.
JUNE 2011
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Dedication
Dedicated to my worthy Father and Mother.A pioneer for my
better future whose mature, valuable guidance, enable me to perceive
and pursue higher ideas in life. Last but not least I want to thanks
my cousin Sarfraz Alam (MTO NBP) whose guidance is always
with me and without his financial support I cannot able to
complete my degree.
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Certificate by the Research Supervisor
I certify that the contents and form of thesis submitted by Mr.
Farman Ali, Roll No: 454, Reg No: 2007-GCUF-2740-614 has
been found satisfactory and according to the prescribed format. I
recommend it be processed for evaluation by the External Examiner
for the award of degree.
Signature..
Name.
Stamp
Chairperson Dean,
Faculty of Science and Technology,
GC University, Faisalabad.
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Acknowledgement:
With pen in hand, I pause to think what do justice to express my gratitude to
Almighty Allah for his unlimited graciousness because words are scare,
knowledge is limited and time is short to express his majesty. I have the
purls of my eyes to admire the blessings of the compassionate, omnipotent,
the omnipresent, the merciful and the beneficent Allah who is the entire
source of all knowledge and wisdom. Due to His bounteous bless, I became
able to contribute this research report to wards the deep ocean of knowledge
already existing.
I deem it great honors to offer my heartiest gratitude to my venerable
supervisor SIR SAIF, for his cooperation, valuable suggestions, inspiring
guidance, affectionate supervision and consistent encouragement through
out this period. I also wants to thanks to my vulnerable teacher sir Imran
(Lecturer Economics depatmetnt) for his guidance and help. I cannot ask for
more from my mother, Firdous Bano, as she is simply perfect. I have no
suitable words that can fully describe her everlasting love to me. , I
remembered her continuous support when I encountered difficulties.
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Mother, I Love you. I feel proud of my Brothers & sisters; they have always
been my best counselors.
Finally, I acknowledged my gratitude to all my friends, my roomates for
being the surrogate family during four years, I stayed here in Faisalabad. I
am really thankful to them for their kind Moral support.
Allah the Almighty bless my parents and my well wishes with good health
and prosperous long lives and be source of prayers for me.
` FARMAN ALI
BBA (B&F)
8TH
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Table of Contents
Table of Contents ....................................................................................6
Chapter 01 ...............................................................................................8
1.INTRODUCTION ............................................................ 8
1.2 OBJECTIVEOFTHE STUDY: ........................................................................14
1.3 HYPOTHESIS............................................................................................16
1.4 SIGNIFICANCEOF STUDY............................................................................17
Chapter 02 .............................................................................................19
2. Literature Review ..............................................................................19
Chapter 03 .............................................................................................25
3. Methodology ......................................................................................25
3.1. IDENTIFICATIONOF VARIABLES....................................................................25
3.1.5 THEORETICALL FRAMEWORKDIAGRAM................................... 31
3.3 MODEL..................................................................................................32
CHAPTER 04 ................................................................. 34
4.RESULTSAND DISCUSIONS..................................................... 34
CHAPTER 05 ..................................................................... 42
CONCLUSION ..................................................................... 42
REFERENCES...................................................................... 44
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List of Abbreviations
FDI Foreign Direct Investment
GOP Government of Pakistan
BOI Board of Investment
GDP Gross Domestic Product
SSA Sub Saharan African Countries
LC Cost of Labor
FOREX Exchange Rate
TO Trade openness
SBP State Bank of Pakistan
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CHAPTER 01
1.INTRODUCTION
1.1 Foreign Direct Investment
Foreign direct investment (FDI) is defined as "investment made to attain
lasting interest in enterprises working outside of the economy of the
investor. United Nations defines FDI as the control in this case as owning
10% or more of the ordinary shares or voting power of an incorporated firm
or its corresponding for an unincorporated firm. "The FDI relationship
comprises of a parent enterprise and a foreign associate which together form
a universal corporation (Transnational Corporations). In order to meet the
criteria as FDI the investment must afford the parent enterprise control over
its foreign affiliate.
A foreign direct investor may be classified in any sector of the economy and
could be done by of an individual, a group of related individuals, an
incorporated or entity, apublic companyor company, a group of related
enterprises, a government body, and anyestate (law), trust or other societal
organization or any combination of the above.
FDI is playing a key role in the international busienes.It provides a new
markets, access to new technology, enhancement of skills, and cheaper
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http://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Trust_(law)http://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Trust_(law)http://en.wikipedia.org/wiki/Public_company -
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production facilities to the firms. In this period of globalization, FDI
inflows are increasing at a greater rate then ever. It is been founded that the
rate of growth of world FDI is ten times greater than the growth rate of
GDP over the period of 1960 to 1990(yang et al 2000).Due to this
globalization factor FDI also posses its own increasing importance and it is
now becoming a prime concern for a policy makers to make effective
foreign direct investment policies.FDI has its many facets, but exacting
aspect that policy makers in capital starved countries are disturbed with the
basic and key determinants of FDI inflows.
Today the ongoing process of amalgamation of whole world economy and
liberalization in many developing countries had led to a severe competition
of flow of FDI. Mostly the countries of Asia are in great competition with
each other to better attract foreign direct investment to its country, Most of
countries are providing its level best to improve fundamentals of economy
and infrastructure of country by attracting more foreign direct
investment .Most of developing countries used to change many of its
policies and relax many measures like taxation matters, attitude, and by
Better control over macroeconomic variables
Pakistan is also considered as a developing country and its in race with
other Asian countries to attract some handsome inflow of FDI to country.
As Pakistan has its own important geographical location ,it is considered as
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a gateway of Asia and it possesses the remarkable attractive conditions for
foreign direct investment especially in the sectors like Telecommunication,
Agriculture, Power and services sectors. Apart from these sectors Pakistan
commodity sector has more attraction for better inflow of FDI because
government of Pakistan is offering 100% equity investment in commodity
sector.
Table 1. FDI inflows into Pakistan
Year FDI (Millions) Annual GrowthRate
FDI AS % ofGDP
1999-2000 469.9 - 0.51 0.55
2000-2001 322.5 - 31.37 0.82
2001-2002 484.7 50.29 1.17
2002-2003 798.0 64.64 0.98
2003-2004 949.4 18.97 0.99
2004-2005 1524.0 60.52 1.38
2005-2006 3521.0 131.04 2.77
2006-2007 5139.6 45.97 3.57
2007-2008 512.8 0.26 3.20
Source Board of investment
By making overview over some past years like in 1980s government of
Pakistan has taken market economic reform policies and after that
government has used to gradually liberalize its policies of trade and
investment by providing many monetary and fiscal incentives to foreign
investors like concession in taxation policies, tariff reduction , welcoming
attitude Khan(1999).Then gradually government of Pakistan used to make
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further liberalization in 1990s and give birth to many other sectors like
Telecommunication, Agriculture, and insurance to FDI. But unfortunately
because of immediate political changes and inconsistency in policies of
government leads to decline in the FDI and it is considered to be quite low
as compared to other developing Asian countries like China and Malaysia.
By viewing the overall statistics of FDI inflow in Pakistan it is $5409.8
Million during the period of FY 2007 to 2008 which is considered as 5.27%
higher than FY 2006 to 2007 and 53.65% more than FY 2005 to 2006 the
overall inflow from 1999 to 2010 are as mentioned in table 1.Recently
government of Pakistan has relaxed its policies regarding investment and
opened almost all the sectors of economy to attract handsome FDI in
Pakistan.GOP is offering tax relaxations and may other investment
incentives to foreign investors which enables them to achieve 100%
possession for investment in many sectors of country .Meanwhile in this
new policy of investment government of Pakistan has provided the equal
opportunities of investment for both domestic and international investors.
In current scenario no any country wishes to make investment in Pakistan
because of the conditions which are going worst and worst day by day So
my this study is basically based on tracing the key determinants of FDI and
how it influences the overall economy of Pakistan .
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The body of literature recommends that FDI is directly links with economic
environment of host country. Most of studies suggest that the factors which
influence FDI are mostly of cost related, macro economic factors and the
overall the development strategy of a host country. Some of studies suggest
that economic conditions or fundamental policies of the recipient countries
are considered as a determinant of flow of FDI.. This literature is in line
with Dunnings eclectic paradigm (1993), which suggests that it is the
locational advantages of the host countries e.g., market size and income
levels, skills, infrastructure and political and macroeconomic stability that
determines cross country pattern of FDI. Following this approach Nishat
and Anjum (1998), have estimated that political stability, peaceful law and
order situation, level of technical labor force and mineral resources and
liberal policies of the government attracted foreign investors in Pakistan.
However, it has been argued that the location specific advantages required
by foreign investors are changing in the globalised more open economies of
today. Accordingly, in his path breaking work Dunning (2002) finds out
that FDI from more advanced industrialized countries depends on
government policies, transparent governance and supportive infrastructure
of the host country. However, very few studies exist that have empirically
estimated the impact of selective government policies aimed at FDI
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The present study which I am going to carry out is aiming at identifying the
basic and significant determinants of FDI in Pakistan which influences
foreign investors decision to make investment in Pakistan over the period
of 1999 to 2009. By reviewing literature the most of determinants of FDI in
different countries are same but the results are quite different because of
different techniques used by different researchers My study is basically
comprises of two dependent variables namely Foreign Direct Investment
and Economic growth while independent variables are trade openness. ,
Gross domestic Product, Exchange Rate , Labor Cost, and Trade
openess,.One of the key advantage of this study is that it also provides
information about how FDI influences economic growth of country and the
interaction among them. During the study I am going to use regression
analysis to find out relationship between each variable of study.
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1.2 Objective of the Study:
There is a substantial body of literature is available that analyzed the effect
of determinants of FDI .These determinants are approximately same in
every country but the results of every researcher is different. My present
study is not only based on analyzing the determinants of FDI only, it also
investigates its role and effect on economic growth of Pakistan. This study
is also helps policy makers to attract handsome FDI into country by
controlling the factors which discourages FDI.
The earlier literature in this connection is essential but hardly substantive or
realistic to understand the determinants of FDI and recent rise in FDI, no
study has been conducted to study the factors responsible for recent changes
in FDI, the earlier studies are either superficial or theoretical and mainly
focusing the socio-political and economic constraints for low level of FDI
and its reasons. No quantification model or simple OLS regression has been
applied to generate the nature of relationship among the set of variables. A
lot has been changed since, the accelerated economic reforms or recent
stability specially after 9/11, or nuclear tests of 1998 and resultant economic
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sanctions and the nature and working of the key macro economic variables
etc, Other than this the interrelationship of different factors, forecasting and
the causality direction with respect to social and political risk index
measurement still missing in earlier studies, which requires the further
investigation. Consequently, this study is designed to understand the
number of factors determining the recent changes in foreign investment in
the country.
Objectives in short are:
To investigate the key Determinants of FDI in Pakistan.
To access the affect of FDI on economic growth
To study the changes of FDI in Pakistan
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1.3 Hypothesis
Hypothesis 1:
H1: Labor cost has negative impact on foreign direct investment.
Hypothesis 2:
H2: The higher value of host currency, higher the level of FDI inflows in
host country.
Hypothesis 3:
H3: Better gross domestic product, higher the rate of FDI into country.
Hypothesis 4:
H4: Trade openes has positive relationship with FDI
Hypothesis 5:
H5: Higher the foreign direct investment, higher the Economic growth.
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1.4 Significance of Study
This study is conducted to analyze important dimensions of foreign direct
investment in Pakistan in light of different studies conducted by a variety of
different researchers from all over the world .This study also investigates
the impact of FDI on the economic growth of country.
Pakistan being developing country has not being a large recipient of FDI
.Since government of Pakistan is making many facilitating steps to attract
FDI inflows in Pakistan. The one and only basic reason behind attracting
FDI is to stabilize itself economically and overcome the increasing rate of
unemployment but from couple of years the rate of FDI is continuously
decreasing because of variety of reason like infrastructure, country
condition, and politically instability .So this study also has its own
importance because study itself identifies the key determinants of FDI
.Apart from the above mention benefits this study also beneficial for a
foreign investor who wants to make investment in Pakistan because it
provides him all the necessary information regarding determinants of FDI
and what is the basic reason behind the continuous downfall in FDI in
Pakistan.
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To highlight the importance of macro-economic factors and their role in
foreign investment, so that it provide benefit to government and public by
increasing employment this leads to economic development. Last but not
least this study helps in studying government policies on FDI and to aware
the policy makers from the importance of FDI, so that they can make
policies accordingly which provide benefit to our country and attract foreign
direct investment.
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CHAPTER 02
2. LITERATURE REVIEW
There is substantial body of literature is available on Determinants of
Foreign direct investment some the important contributions of different
researchers are as under
Usha et al (1999 -Revised 2000), used a mixed fixed and random (MFR)
panel data estimation method to allow for cross-country heterogeneity in the
fundamental relationship between FDI and growth, found that the
relationship between investments, both foreign and domestic, and economic
growth in developing countries is highly heterogeneous and that estimation
methods, which assume homogeneity across countries, can yield misleading
results. The results suggest that there is some evidence that the efficacy of
FDI in raising future growth rates, although heterogeneous across countries,
is higher in more open economies.
(Asiedu, 2002) discuses the determinants of FDI to developing countries.
This papers aims at whether the factors which influences the FDI in
developing countries would affect the sub Saharan countries differently,
simply means if Africa is different. The factors like Real GDP
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infrastructure, Labor cost, Openness, Taxes and Tariff, Political stability are
used as independent variables while that of FDI is considered as dependent
variable of the study. The results of study indicate that increase in
investment and development in infrastructure produces a positive impact on
inflows of FDI in none SSA countries while but fails to produce a positive
impact on countries of SSA.The other factors like openness promotes FDI
inflows to SSA countries and also for non SSA countries. This paper
suggests that African government should develop a method to increase
reliability of the reform policies. Second thing is that those policies which
are very much successful in other countries should not be implemented
directly to the Africa or replication of these policies in Africa is not
beneficial because these policies lead to different impact.
(Shah & Masood, 2003) conducted an empirical investigation regarding the
Determinants of FDI in Pakistan perspective.FDI inflows in Pakistan are
considered as a dependent variable during the study while the variables like
Cost factors, political factors, social factors, Cost of capital and market size
are considered as a independent variables. During the study they used
regression and cointergration techniques to find impact of independent on
dependent variable. They concluded that there is no exception for Pakistan
to keep itself apart of this internationalization process. Instead the size,
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resources and perceptions are advocating for fruitful and fast growing
investment opportunities. Resource gap, can only be achieved by reducing
public burden and by the encouragement of private business activities in the
country. FDI is a potential source of filling this multidimensional gap.
(Bevan & Estrinb, 2004) carried out research on Determinants of FDI in
case of European transitional economies. This objective of the study aims at
determining the key determinants of FDI from western countries, primarily
in the European transitional economies. The factors like labor cost, gravity
factors, market size, Trade factors GDP are used as independent variables
for the study. After this study they found that factors like market size, unit
labor cost and some gravity factors are considered as key determinants of
FDI while the country risk of host is not a significant determinant. They
also founded that there is a positive relationship between host country and
source country GDP, while it is inversely related to the distance among
countries and unit cost of labor. This paper suggests that integration with
European Union is very much important for FDI in transitional economies.
(Moosa & Cardak, 2005) they examined the some of eight determinants of
FDI through extreme bond analysis to a cross sectional sample which
composed of some 138 countries over the period of 1998 to 2000. During
their study they used GDP, Growth rate of GDP, Exports as percentage of
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GDP, Commercial energy used per capital, Country risk and Tertiary
Education and students while FDI as percentage of GDP is considered as
dependent Variable of study. Results of study clearly stated that three
variables namely export as percentage of GDP, Risk of country, and
Telephone lines per 1000 of population are considered as robust variables
which highly influences dependent variable. At the end they concluded that
countries which are economically developed are successful to attract FDI
inflows to its country. They also explored that consumption of energy, rate
of growth, and real GDP insignificantly increases the inflows of FDI.
(Ali & Guo1, 2005) this study empirically focuses on the determinants of
FDI in china, This study is based on the analyses of responses from 22 basic
operating firms in china by sharing views about what are the basic
motivations for firms to accept FDI.Cost of capital, geographical distances,
cost of labor, polices of government, and cultural differences are considered
as the basic factors which attract FDI in china. During their study they
found that there is huge potential market size exists in china and one of the
key finding is that global integration is one of the key factor for those firms
which are going to invest in china. Further they concluded that foreign firms
dont come to china by aiming of taking advantage of any one single factor
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(Ang, 2007) examines the basic determinants of FDI in Malaysia over the
period of 1960 to 2005.During his study he used GDP, Growth Rate,
Infrastructure, Trade openness, Exchange rate, Tax rate, as independent
variables while FDI is dependent variable. By utilization of annual time
series data he concluded that increase in level of level of infrastructure,
Openness in trade related policies, Financial Development, leads to
development in FDI inflows. While policies like increase in taxation,
appreciation in rate of exchange, Closeness in policies of trade ultimately
leads to decrease in level of FDI or normally discourages FDI
inflows.Meanwhlie he suggests that strong economic growth is very much
necessary and need to b focused for the better attraction and encouragement
of FDI into Malaysia.
(Nawaz, 2010) Work mutually to investigate the determinants of FDI in
Pakistan. During their study they used OLS model and analyses some of
variables like GDP and its growth rate, exports price index, imports, and
volume of exports. The results of paper suggest that by utilization of
regression it is confirmed that their exists a positive relationship between
increase in GDP and FDI and one of important finding is that export
demand that is shown by bulk of exports is a key determinant of FDI in
Pakistan. They concluded that there is need of change in policy of
investment in Pakistan to attract FDI at greater extent and it should focus on
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export oriented industries instead of encouraging FDI for domestic
consumption.
(Awan, Khan1, & Zaman, 2011) studied a nexus between foreign direct
investment and Pakistan economy by using co integration and Error
correction Approach during the period of 1971-2008 .This paper comprises
of FDI as a dependent variable while trade openness, current account
balance , Gross fixed capital formation, Inflation rate , GDP at factor cost as
independent variable.
From the results of model used it shows that there is a positive association
between FDI and the independent variables. This study concluded that by
focusing on these determinants Pakistan can enhance its economic situation
and growth as well and they recommend that government of Pakistan
should always open its door policy to attract enough FDI inflow into
Pakistan
(Cuyvers, Soeng, Plasmans, & DenBulcke, 2011) conducted research on
determinants of FDI in Cambodia. The basic aim of this paper is to analyze
the key determinants of factors which might influences the FDI inflows in
Cambodia during the period of 1995 - 2005.One of the essential element of
this study is that it includes geographical and economical, and political
characteristics of Cambodia This research paper is comprises of dependent
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variable as FDI while market size, Labor cost, Borrowing costs, Exchange
Rates, Country Risk and Geographical Distance. During the study panel
data sets were used for both approved and realized FDI.Results of the study
suggest that the determinants of both realized FDI and approved FDI are
very much similar to each other. The variable like country GDP, Rate of
exchange and Trade with different host countries have produce positive
impact on FDI inflows while the factors like geography of Cambodia
negatively affects the inflows of FDI.
CHAPTER 03
3. METHODOLOGY
3.1. Identification of Variables
This study is going to be conducted on two dependent variables and some of
four independent variables
3.1.1 Dependent Variables
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Dependent variables which I am going to study are as under
3.1.2 Foreign Direct Investment
Foreign direct investment (FDI) is defined as "investment made to attain
lasting interest in enterprises working outside of the economy of the
investor."The FDI relationship comprises of a parent enterprise and a
foreign associate which together form a universal corporation (TNC). In
order to meet the criteria as FDI the investment must afford the parent
enterprise control over its foreign affiliate. The UN defines control in this
case as owning 10% or more of the ordinary shares or voting power of an
incorporated firm or its corresponding for an unincorporated firm.
A foreign direct investor may be classified in any sector of the economy and
could be any one of the following
An individual
A group of related individuals
An incorporated orunincorporated entity
Apublic company orprivate company
A group of related enterprises
A government body
Anestate (law),trust or other societal organization or any combination of
the above.
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http://en.wikipedia.org/wiki/Unincorporated_entityhttp://en.wikipedia.org/wiki/Unincorporated_entityhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Trust_(law)http://en.wikipedia.org/wiki/Trust_(law)http://en.wikipedia.org/wiki/Unincorporated_entityhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Private_companyhttp://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Trust_(law) -
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The total inflows of FDI from the period of 1999 to 2009 are shown in table
1.The data is taken mostly from websites of board of investment ,
Statistical Bureau and State bank of Pakistan
3.1.3 Economic Growth
Most Of economist agree that inflows of FDI results in increase in
economic gtowth of economy(Blonigen,2005).The major characteristic of
FDI in economic growh are advancement in technology ,and globilazation
factor.In other words enhancement in inflows of FDI leads to help to narrow
the gap between domestic saving ratio and level of investment.From
literature the relationship between growth and FDI provides a mix form of
empericical evidences like ,De Mello (1999) founded that whether FDI
contributes to the growth of eciniomy depends upon the characteristics of
recipient country.However Johnson (2006) founded that inflows of FDI
boosted economic growth in countries which are on track of development.
My present study seeks to contribute to the empricial literature on
relationship between economic growth and Foreign Direct Investment.In
this study I am taking Gross Domestic product form 1999 2009 and
relationship between Foreign direct investment and economic growth is
shown thourgh covariance .
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3.1.4 Independent Variables
Those variables which serve as independent variables of study are as under.
(a).Exchange Rate (FOREX)
Foreign exchange is used evaluate the position of foreign exchange reserves in
order to determine the stability in exchange market and the overall
macroeconomic policies of GOP. Thus appreciation in the value of home
currency leads to positive results on FDI while there are also some evidences
which reveals the negative relationship between FOREX and FDI inflows
(Dewente, 1995 and Kiyotaand Urata,2004) .Forex plays a key role in stability
of economy of any country.Apreciation in value of home currency leads to
increase in the FDI and it becomes very much cheaper to hire labor at low rate.
The massive FDI inflows and remittances from workers have significantly
cherished the real equilibrium exchange rate of Pakistan. (Hafeez ur rehman and
Atif Ali).In this study I am going to take yearly rates by taking average of all
twelve months of one year and so on respectively. The basic data I will take in
Pak rupees and collected from various sources like State bank etc
(b).Labor Cost (LC)
Low cost of labor is the essential element in attracting FDI inflows into
country (Jun and Sing, 1996).There exist positive relationship between FDI
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and labor cost but some empirical studies like (Bevan and Estris, 2004, Wei
and Liu, 2004)suggests the negative relationship. However Meyer (1995)
concluded that multinational organizations in Eastern and Central Europe
are not necessarily motivated by low labor cost. In this study I go with the
negative relationship of Labor cost with FDI and I am taking wages rate
from 1999 2009 which is being fixed in annual budget of Pakistan .I take
this data from budgets of respective years.
(c).Trade openness (TO)
Trade openness is the ratio of imports and export to GDP; this usually
measures the openness of economy. The impact of openness on FDI is
totally dependent on the investment type. Many researches concluded with
the positive relationship of FDI to trade openness like Chakraborti (2001),
Asiedu and Fedderke (2006).In this study I also make a hypothesis of a
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positive relationship between FDI and trade openness. Here I am going to
take imports as percentage of GDP.
(d). Gross Domestic Product (GDP)
Gross domestic Product is defined as the sum of market prices of all the
goods and services produced in Pakistan. Some of the studies like
(Muhmmad Zahid Awan ,Bakhtiar Khan, 2010) founded that GDP is 5 %
significant which shows that high growth in different sectors will leads to
maximum attraction of foreign direct investment in Pakistan. Here in this
study I also make a positive relationship of GDP to FDI and the I will get
data from sources like State bank of Pakistan and federal bureau of
statistics.
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3.1.5 Theoreticall Framework Diagram
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3.2 Data used in Study
The study is based on time series data over the period of
1999 to 2009 which is obtained from various sources like
Board investment ,Federal Bureau of statistics, State bank of
Pakistan, budget of various years, and economic survey of
Pakistan.
List of Explanatory Variables
S.NO Variable Definition Reason for Including
01 GDP Real Gdp Captures demand for goods and services
and Provides a representation of the
marketsize hypothesis
02 To Value of
imports of
counrty
Indicates the degree of international
exposure .A measure of openness of the
economy
03 Lc Wages rates It captures the capabilities and skills of domestic labor
04 Forex Average of
montly rates
in year
It is core factor while considering
investment by foreign investors
3.3 Model
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Here I have examined different case studies .which was conducted by many
well-known researchers like moosa and carsdak. My study is basically
based on the impact of some four necessary independent variables like
Trade openness, Exchange Rate, Gross domestic Product, and labor cost on
foreign direct investment. I am going to apply statistical tools like
regression analysis to find relationship among determinants and FDI the
relationship between FDI and economic growth is being calculated by
correlation while the model is taken as suggested by Muhammad and
Bakkthiar khan (2011). But the variables of the study are somehow bit
different. So the relationship is as under
FDI=
Where
FDI = Foreign Direct Investment
LC = Labor Cost
FOREX = Exchange Rate
TO = Trade openness
GDP = Gross Domestic Product
t = Error term
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Table 3.1 Variables and their expected Sign
S.no Variables Expected Sign
01 Exchange Rate >1
02 Trade Openess >1
03 Labour Cost 1
The above table shows that the variable which is less than has negative
relationship with Foreign direct investment while those variables which are
greater then one is significant and have positive relationhip with Foreign
direct investment.
CHAPTER 04
4.Results and Discusions
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Descriptive statistics on the dependent and independent variables of my study is presented
in table 4.1.1. This table explains the summary statistics for the variables used in the
model. The table shows the results about determinants of FDI In Pakistan for the period
of 1999-2009.
Table 4.1.1 Descriptive Statistics (Determinants of FDI)
Mean Std. Deviation N
FDI 1767.509 1961.6557 11
FOREX 62.943775 9.4824768 11Trade Openess .004196 .0016707 11
Labour Cost 3645.45 1404.538 11
Gross Domestic Product 4569508.09 794619.737 11
The standard deviationof various variables presents the extent to which
variables may deviate from their average value. The mean value of Forex
is 6.2% that shows 62% foreign exchange rate is reported during this study
period. Standard deviation is 9.482 It shows that the value of forex can
deviate from average(mean) to both sides by 948.2%.
The mean value of Trade openness is 0.004196 while its standard deviation
is 0.0016707 which shows that value of trade openness can deviate from
mean by 1.67%.
The mean value of Labor cost is 3645.45 while its standard deviation is
1404.538 this means that labour cost may deviate from mean by
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1371.462.There exists a greater chance of deviation of labour cost from its
mean value.
Gross domestic product posses a mean value of 4569508.09 while its
standard deviation is 794619.737 which means that GDP can deviate from
its mean by 794619.737.As standard deviation is less from mean which
depicts that there is less chance of deviation of GDP from its mean value.
Table 4.1.2
Regression Results on Determinants of FDI
Coefficient T Statistics
Intercept 11915.777 2.516Forex -225.719 -3.340*Trade Openess 2001697.065 4.158**
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Labour Cost .832 1.074GDP -.002 -1.512*
R Square .946Adjusted R Square .824
*Significant at 90%
**Significant at 95%
Table 4.1.2 presents regression results obtained by using statistical
tools . The table shows estimated coefficients and their t statistics. The
value of R square is 0.949 that show that 0.949 variation in the FDI.
T value for Forex is -3.340, which shows that the relationship
between exchange rate and foreign direct investment is insignificant .The
coefficients value is found to be -225.719. It shows that with one unit
change in value of FOREX ,FDI changes by -225.719.
These results are also same as Scott- Green (1999) who shows that
appreciation in the value of home currency leads to increase in the inflows
of FDI at a greater extent because it become easy to hire more and more
skilled labour and other resources at cheaper rate in recipient country .There
exists a several reasons in how increase in value of home currency can
increases FDI ,Firstly depreciation in value of dollar can increases the
confidence of home investors ,secondly the depreciation in value of dollar
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makes assets much cheaper in Pakistan which becomes a easy for foreign
investors to buy Pakistani assets and thirdly a depreciation of US dollar will
make goods produced in pakistan relatively cheapere as compared to goods
produced in home country .Thus results shows a positivee relationship
between foreign direct investment and exchange rate.This means that if the
currency value of home country is goes on increases day by day then its
leads to enhancement in confidence of foreign investors to invest in
Pakistan.
T value for trade openness is 4.158 which shows that the relationship
between FDI and trade openness ins significant at 95% and if there is one
unit increase in trade opness would generate about a 2001697.065 increase
in foreign Direct Investment.The findings of study are in line with
that of Fedderke (2006) and Chakraborti and Romm(2006)
who also shows a positive relationship between trade
openness and foreign direct investment.Hence ,the results
suggests that increase in liberalization of trade setor may be
codusive to inflows of FDI at larger extent.
T value fo GDP is -1.512* this shows that GDP is significant at 90 % and
its value of coeeficient is -.002.This means that with one unit increase in
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value of GDP then FDI changes to -.002. This shows a positive relationship
between FDI and GDP .Investors in any country are attracted due to higher
GDP growth rate of its economy.This evidence suggests that economic
growth is very much necessary for Pakistan to attract FDI inflows .These
results are very much similar with general finding of literature like Wang
and Swain (1995) , Choi and Bollington(1999) which have consistently
found a positive role of GDP growth rate in attracting FDI and fouded that
GDP growth is very much necessary for foreign direct investment.In
Pakistan perspective these results are in line with study of Muhammad
Zahid, Bakhtiar Khan (2010) who shows that foreign investors will
encourage in making investment in Commodity- Producing sector of
Pakistan due to high GDP rate.Hence results implies that GDP growth is
very much necessary to bring inflows of foreign direct investment into
Pakistan .
T value for Labor cost is 1.074 which shows that the relationship between
FDI and trade openness ins significant at 90%. The coefficients value of
labor cost is found to be 0.832 which means that one unit increase in labor
cost will leads to 0.832 change in value of foreign direct investment.The
result of study are also same with (Jun & Singh, 1996) who shows that
lower labour costs make countries with abundant skilled and/or unskilled
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workers more competitive and attractive, andare likely to encourage FDI
inflows .Hence from results it is concluded that skilled labor is very much
beneficial for attracting Foreign direct investment
The whole summary of model is shown as under in the table 4.1.3
Table 4.1.3 Model Summary
Model R R Square
Adjusted R
Square
Std. Error of the
Estimate
1 .946a .894 .824 824.0872
a. Predictors: (Constant), LC, Forex, GDP, TO
In the above table value of R square is 0.949 which means that there is
94.9 % variation in Foreign direct investment is explained by independent
variables.
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Table 4.1.4 Coefficient Correlationsa
Model GDP Forex TO LC
1 Correlations GDP 1.000 .405 -.545 -.557
Forex .405 1.000 -.116 -.737
TO -.545 -.116 1.000 -.231
LC -.557 -.737 -.231 1.000
Covariances GDP 1.140E-6 .029 -279.929 .000
Forex .029 4566.715 -3760834.136 -38.583
TO -279.929 -3760834.136 2.318E11 -86139.516
LC .000 -38.583 -86139.516 .600
a. Dependent Variable: fdi
correlation is used in this study for data to find out the degree of association
between variables.
From above table it is concluded that Gross domestic product is it is
negatively correlated with trade openness and labour cost which means that
increase in value of GDP leads to decrease in values of skilled labour and
the it is easy to get labour while the values of trade openness also get
decrease in such a way that our imports becomes less and exports
greater.GDP shows positive correlation with exchange rate which depicts
that increase in GDP leads to betterment in value of exchange rate..
Forex shows negative correlation with variables like Labour cost and trade
openness which means that increase in the value of exchange rate then value
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of trade openness and labour cost get decreases.The value of imports of
country goes up and labour becomes expensive within a country .
Labor cost in negatively correlated with other variables like GDP, forex and
trade Openness while it is positively correlated with itself which means that
with the increase in the value of labor cost leads to decrease in value of
foreign exchange ,Gross domestic product and trade openness
Trade openness shows negative correlation with all variables which means
that increase in value of imports of country produces negative impact on
gross domestic product , labor cost and exchange rate .
Chapter 05
Conclusion
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Foreign direct investment is considerd to a most important element of
Globilization .Over the last few years there is a sharp growth in FDI inflows
into developing countries and developed countries.FDI is playing key role
in economic development of developing countries including
Pakistan.Pakistan is one of the most ideal location for foreign investment
.There is lot of oppurtunities for foreign investors in sectors like power and
energy ,telecomuincation and fertilizers sector.
The basic purpose of this study is to examined the determinants of foreign
direct investment into Pakistan over the period of 1999 2009.To examined
the impact of variables regreesion technique is being used .From results of
study it is explored that some of the independent variables are insignificant
while some of variables are significant toward foreign direct investment.
The variable like gross domestic product ,labor cost and trade openesss are
significant and possess a positive relationship with foreign direct investment
.This means that for better foreign direct investment there is need of
openness in trade ,skiled labor and strong GDP.while the variable like forex
shows insignificance with FDI.
Apart from the above variable there is need of analyzing the current
condition of Pakistan .Nowadays Pakistan is in cage of too much energy
shortages, terrorism and other security problems and in these circumstances
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no any contry or individual investor wishes to make investment in Pakistan.
Now this is a major responsibility of government of Pakistan and policy
makers to think about these core issues and make some advance measures to
regain the confidence of foreign investors because foreign investment
contributes positively to our economy.
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