Circle Of Poverty In Developing Countries Economics Essay

All the underdeveloped economic systems are entrapped by the barbarous circle of poorness. These states lack the basic capital resources. Income of the people is really low due to which nest eggs are low and finally it ends in lower investings. In add-on, due to the lower income degrees the nonexempt capacity is low intending that authorities ‘s earning is besides low. Under such fortunes these states have to confront saving-investment spread & A ; Balance of payment spread. To carry through these spreads these developing states have to trust on Foreign Capital Investment to speed up the growing procedure and to make full saving-investment spread & A ; BOP spread. Foreign Capital Investment can come in many signifiers including ; Foreign Aid, Official Development Assistance, Official Aid, FDI, Foreign Portfolio Investment and adoption ( Ghulam 2006 ) .

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Regardless of the fact that all the developing economic systems have to trust on any of these beginnings to speed up the procedure of growing, the sum and the signifier of FCI differs from state to state and depends on the single economic status of that peculiar state. In instance of Pakistan, FCI plays a important function in the economic development. Pakistan deficiency basic capital investing, engineering, human resource. And due to the state ‘s political and economic status, Pakistan has to trust on FCI.

During the period of 1950 Pakistan along with the other south Asiatic states pursued a policy of import permutation. In 1970 Srilanka took a progressive measure toward policy reforms in favour of progressive liberalisation and globalisation. These macro economic reforms were adopted by all south Asiatic courtiers due to the derived benefits. This Post reform period in all south Asiatic states is characterized by high growing and economic development. Pakistan introduced these reforms in late 1980 ‘s. One of the most of import benefits of these economic reforms was the increased influx of FDI ( Mehta, 2006 ) .

The current research merely concentrates on foreign direct investing instead than capital flows in general because it is closely connected to non merely the transportation of capital but besides helps in transportation of capital, direction & A ; selling accomplishments and advanced engineerings between states. And secondly, for the past 40 old ages and so the influx of FDI specifically in South Asia has increased drastically.

FDI is the investing made by a company outside its place state. It is the flow of long-run capital based on long term net income consideration involved in international production. This definition is right but non complete as the of import issues of control and direction are non included in it. International investing can take two signifiers. It could either be portfolio investing, where the investors buy some non-controlling part of the stock, bond or any other fiscal security, or direct investing where the investor participates in the control and direction of such concern venture. This is the type of investing by transnational companies and it tends to lend more to economic growing than the portfolio investing

( Adewum, 2006 ) .

FDI brings in complimentary capital and engineering necessary for rapid growing every bit good as it provides entree to planetary production and selling webs. As noted above South Asiatic states had a reasonably restrictive government and it is merely in the last decennary that they have opened up and made their policies conducive to greater foreign investing. Initially, FDI was allowed in a restrictive mode and on reciprocally advantageous footings where bulk interest were to be held by domestic houses. However, South Asiatic states tried to promote FDI more sharply in the 1890ss, by doing alterations in their macroeconomic policies along with trade and FDI policies ( Mehta, 2006 ) .

The strength to pull FDI for all the major South Asiatic states in the epoch of 1990-2003 has more than doubled except for Pakistan. It can hence be interpreted that although the macro economic reforms have been successful in pulling greater FDI influxs but the influxs are non important when compared with other states of the same part.

Table1: Ratio of FDI Inflows to GDP ( in % )



















Beginning: ( Mehta, 2006 ) .

As per the information in the above tabular array, Pakistan was non able to pull adequate sum of FDI to speed up the growing procedure because of the prevalent economic policies at that clip. Sri Lanka has the largest strength to pull FDI influxs ( 1.25 % of GDP ) followed by India and Pakistan ( Mehta, 2006 ) .

This research will discourse whether the alterations in those reforms have any impact on the growing procedure or non. And if it does, so is it worthwhile for the authorities to modify those policies to pull more MNCs to convey FDI in Pakistan?

The intent of this thesis is to show the function played by FDI in speed uping GDP growing, so as to cognize whether the call for more FDI is genuinely justified.

The flow of FDI has been drastically increased in the last twosome of decennaries doing it a cardinal country for the farther research. Increasing attending has been paid in all developing states in recent old ages to the inquiry of how to pull more FDI. This reflects both the rapid growing in foreign direct investing, and concerns about the costs and benefits of foreign investing, such as whether inward investing affects employment and economic growing and whether outward investing is merely ‘job exporting ‘ , with houses traveling to low-priced, labor-abundant locations ( OECD, 2002 ) . So a batch of researches have been done these yearss on this subject so that such inquiries can be answered.

The subject is of great importance because of the advantages that FDI brings to the place state. one of the chief advantage of foreign direct investing is that it helps in the economic development of the host state where the investing is being made through ; get the better ofing fiscal crisis, by allowing transportation of engineering, human accomplishments, rational belongings, heightening accomplishments of human capital, increasing authorities ‘s gross through revenue enhancement, by making new occupations, by bettering the quality of goods and services being produced, it boosts the exports sector etc plus there is besides some range for new research activities.

This research will assist the authorities in formulating and modifying the right policy mix to pull the targeted degree of FDI. It will besides assist the Central Bank in doing the financial policy where they can put the revenue enhancement marks, helps in finding the revenue enhancement rates every bit good as in the devising of pecuniary policy. The pupils can acquire the clasp of FDI on GDP by understanding the importance of this research which will be a beginning for the hereafter research, besides doing a think tank they can come up with new thoughts and supply consultancy to the local houses and enterprisers so that they can unify with MNCs to derive the cognition of advanced engineerings and accomplishments.

Sing the significance of the subject, this research has been designed. The chief aim of this research is to analyse the impact of the foreign direct investing ( FDI ) on GDP growing of Pakistan. The organisation of this paper follows as: a elaborate reappraisal of literature on the impact of FDI on GDP of the developing states along with the theoretical background of economic theories on FDI is presented in Section chapter II. Chapter III trades with the informations and methodological analysis. Chapter 1V discusses the consequences and their readings while chapter V gives the decision and the policy recommendations.

Chapter 2: Reappraisal OF THE RELATED LITERATURE

The literature reappraisal is divided in to two parts. The first portion chiefly focuses on the footing theories underlying the foreign direct investing and the 2nd portion emphasizes on the Theoretical Framework of FDI Flows and its impact on GDP growing of developing economic systems.


Theories play a important function in finding legal attitudes both nationally and internationally. Theories of FDI assert that the footing for such investing lies in the dealing costs of reassigning proficient and other cognition. Three of import theories of FDI are discussed below.

2.1.1 Neoclassic Economic Theory of FDI

Harmonizing to the Bergten ( 1978 ) the neoclassical economic theory provinces that FDI positively contributes to the economic development of the host state and increases the degree of public public assistance. Some of the protagonists of Neoclassic economic theory and the research workers who have further worked in that field includes ; Seid ( 2002 ) , Kojima ( 1978 ) , Antonelli ( 1991 ) , Reuber, et Al. ( 1973 ) ; Sornarajah ( 1994 ) ; Bergten, et Al. ( 1978 ) , Kennedy ( 1992 ) , Chu ( 1989 ) , Lall ( 1993 ) .

The principle behind this theory is that the MNCs, by conveying FDI in to the host state influences quality and measure of capital formation in that state. On one manus this influx of capital from MNCs and its reinvestments of net incomes increase the entire nest eggs of the state, increases authorities ‘s gross via revenue enhancement and other payments and on the other manus this extract of capital reduces the BOP force per unit area of the host state Seid ( 2002 ) .

The other statement back uping the neoclassical theory is that FDI does non merely brings advanced engineering but managerial accomplishments, selling accomplishments, market information, organisational experience, and the preparation of workers Kojima ( 1978 ) .

Harmonizing to Antonelli ( 1991 ) , MNCs serve as a primary channel for the transportation of engineering from developed to developing states. But the benefits derived from this transportation of engineering depend on the extent to which these inventions are diffused locally. Antonelli ( 1991 ) pointed out that the cost of engineering transportation is affected by handiness of figure of factors and due to the general scarceness of these factors in developing states, the cost of acceptance of new engineering remains high.

The advocates of neoclassical theory further argue that FDI raises competition in an industry with an ultimate betterment in productiveness. This increased competition can take to better allotment of resources, better use of capital, efficient direction and increase in market efficiency. MNCs through Foreign direct investing provides local industry the exposure of international markets, which leads to greater competition, more chance of engineering transportation and finally economic development ( Kojima, 1978 ) .

FDI helps in making employment which finally influences distribution of income. It besides helps in bring forthing foreign exchange which helps in make fulling balance of payment spread Reuber, et Al. ( 1973 ) ; Sornarajah ( 1994 ) ; Bergten, et Al. ( 1978 ) . FDI besides helps in upgrading the local substructure installations which helps in economic development Sornarajah ( 1994 ) . FDI helps in speed uping the economic development as it increases the administrative, proficient and managerial capablenesss of the host state ( Kennedy, 1992 ) .

The steering rule on the Treatment of Foreign Direct Investment incorporates the neoclassical theory when it identifies that a larger flow of foreign direct investing brings important benefits to the universe economic system in general for the developing states in specific in footings of technological promotion, greater competition, enlargement of international trade, enhanced selling & A ; direction accomplishments and entree to international market. The World Bank steering rules on the Treatment of FDI demonstrates that a proper policy mix and openness to FDI may convey more benefits to the host state ( Chu, 1989 ) .

2.1.2 Dependency Theory of FDI

Harmonizing to the Dependency school theory, the impact of foreign direct investing from developed states through transnational corporations ( MNCs ) on developing states is harmful for long term economic growing of the underdeveloped states. Dependency school of though depends on Karl Marx ‘s theory on development and underdevelopment ; Paul Baran ‘s analysis of economic retardation and economic growing ; Andre Gunder Frank ‘s analysis of the development of underdevelopment ; and the Hagiographas of Samir Amin on unequal development ( Fan, 2003 ) .

Dependency school theory argues that FDI and MNCs are harmful for the long term economic development of the developing states in specific. It believes that the rich states becomes richer and exploits the labour and other natural resources of the developing states and the underdeveloped states thereby put in to conditions of go oning poorness. It causes development of labour, hinders growing and causes income inequality. So maintaining in head the above harmful affects, the developing states should develop independently without depending on FDI or MNCs.

The influence of dependence theory peaked in 1970s. Assorted states including East Asiatic and Latin American adopted this point of position and demonstrated a hostile attitude toward FDI. But after seeing the harmful affects of following theses policies on the economic system these states shifted their attending to more broad policies to pull foreign direct investing. This theory is out of the range for this research so it will non be discussed extensively.

2.2. Theoretical Model of FDI Flows and Growth

The function played by the Foreign Direct Investment in the economic development of developing states remains problematic in the literature. Many researches have proved its important and positive impact on economic development, including the researches done by ; Chenery and Strout ( 1966 ) , Bosworth, Collins and Reinhart ( 1999 ) , Loungani and Razin ( 2001 ) , Moss, Ramachandran and Shah ( 2005 ) , De Gregorio ( 2003 ) , Feridunm ( 2004 ) , Bornsztein, Gregorio and Lee ( 1998 ) , Sanchez-Robles ( 1998 ) , North ( 1956 ) , Borensztein ( 1998 ) , Glass and Saggi ( 1999 ) , Blomstrom ( 1994 ) , Balasubramanyan ( 1996 ) , Bengos and Sanchez-Robles ( 2003 ) , Bende-Nabende ( 2002 ) , Aluko ( 1961 ) , Brown ( 1962 ) , Obinna ( 1983 ) , Oseghale and Amonkhienan ( 1987 ) , Das ( 1987 ) , Din ( 1994 ) , Balasubramanyam, Salisu and Sapsford ( 1996 ) , Borensztein, De Gregorio and Lee ( 1998 ) , Dees ( 1998 ) , De Mello ( 1997 ) , Sarumi Adewumi ( 2006 ) , Ben-Taher Hasen and Gianluigi Giorgioni ( 2006 ) , P.P.A Wasantha Athukorala ( 2003 ) , Kevin H Zhang ( 2004 ) , Trevino and Upadhyaya ( 2003 ) , Sjoholm ( 1999 ) and Agrawal ( 2000 ) .

While some other researches highlighted its negative facets every bit good.

On the footing of a research on least developed economic systems, Chenery and Strout ( 1966 ) concluded that FDI has a important and positive impact on GDP and it helps in raising the economic activity. The survey besides made an of import statement, stating that Foreign Investment plays a really critical function in bestiring the economic growing.

Bosworth, Collins and Reinhart ( 1999 ) picked a sample of developing economic systems and applied arrested development analysis to analyse the impact of assorted signifier of FCI on GDP. This research proves that, as compared to the other signifiers of FCI including loans, adoption, portfolio investing and other signifiers of FCI, FDI has a stronger positive Consequence on GDP in developing economic systems. As compared to other signifiers, FDI has strong positive consequence on investing and salvaging which finally lead towards more economic development while other signifiers of FCI has negative impact on salvaging and investing, taking to a negative impact on GDP.

Loungani and Razin ‘s ( 2001 ) analysis besides supported the earlier survey by Bosworth, Collins and Reinhart ( 1999 ) in which they concluded that out of the different signifiers of capital flow ( FDI, portfolio investing and primary bank loans ) to the Least Developed Economies, FDI was discovered to be the most resilient. It can greatly assist in speed uping the growing procedure of developing states.

A similar decision had been given in a survey by Moss, Ramachandran and Shah ( 2005 ) . There study chiefly based on three African states viz. Kenya, Tanzania and Uganda. The survey reveals that in these three states the sum of export from MNEs is far more than the exports from local investors turn outing that the FDI ‘s part to GDP is more than that of the local investing. It might stop up in pass overing local houses out of the market but for that the authorities had to do the right policy mix maintaining in head the cost and benefits of MNCs.

De Gregorio ( 2003 ) supported the above survey done by Moss, Ramachandran and Shah ( 2005 ) . The survey chiefly focused on the Latin America during the period of 1950-1985. The survey proves that the part of FDI to GDP is three times more than that of local investing. The survey reveals that FDI brings in new expertness in the local market with the benefit of holding entree to foreign markets. Harmonizing to the analysis, he found out that increasing aggregative investing by 1 per centum point of GDP increased economic growing of Latin American states by 0.1 % to 0.2 % a twelvemonth, but increasing FDI by the same sum increased growing by about 0.6 % a twelvemonth during the period 1950-1985, turn outing that FDI is three times more efficient than local investing.

Feridunm ( 2004 ) conducted a survey which examined the relationship between GDP and FDI in the economic system of Cyprus utilizing the methodological analysis of Granger Causality and Vector Auto Regression ( VAR ) . The survey proves that there is a strong positive relationship between GDP and FDI i.e. if the economic system of Cyprus manages to acquire the higher FDI, its GDP will increase and frailty versa. Further the consequences of the article suggested that the economic development of the state resides on its ability to acquire more FDI. So the authorities should do policies that can assist the state in pulling more FDI.

Bornsztein, Gregorio and Lee ( 1998 ) besides conducted a survey to prove the impact of Foreign Investment on a state ‘s economic development. The information on the FDI flow from 16 states was taken and the cross state arrested development model was applied. The analysis reported that FDI plays a really of import function in the engineering transmittal, lending more to Gross Domestic Product as compared to local investing. However, his analysis was based on an premise that the host state should hold minimal threshold of human capital so that new engineering can be utilized more expeditiously.

Sanchez-Robles ( 1998 ) besides test the correlativity between FDI n GDP in Latin America in the period of 1975-1985. She picked all the states of Latin America and reported that FDI n GDP are extremely correlated. And the impact of FDI on GDP is extremely important and positive for this peculiar part.

North ‘s ( 1956 ) survey supported the “ Two-Gap Model ” , that is the shortages in Balance Of Payment and nest eggs are major statements in favour of Foreign Direct Investment. He reported that Foreign Direct Investment played an of import function in back uping the import excess and in heightening to entire investing that helped in the economic development.

Borensztein ( 1998 ) & A ; Glass and Saggi ( 1999 ) research proved that FDI is assumed to heighten domestic capital which finally leads to excite the productiveness of domestic investings which thereby have a important positive impact on GDP. Therefore, FDI has through empirical observation been found to excite economic growing.

Blomstrom ( 1994 ) reported a positive impact of FDI on economic development with a status that the host economic system should hold a threshold degree of income above which Foreign Direct Investment seems to hold positive impact on GDP and below which it does non.

Balasubramanyan ( 1996 ) reported positive impact of FDI on economic development.

The impact of FDI varies across states. It mostly depends on the trade policy of the host state. This survey reveals that the impact of FDI on GDP is more in export advancing than import replacing states. Therefore the trade policy should be made in such a manner that it can pull more FDI to back up the state ‘s economic growing.

Bengos and Sanchez-Robles ( 2003 ) proved that even though FDI is significantly and positively correlated with economic growing, but the host states require minimal capital ( human ) , economic stableness and stable markets in order to profit from long-run FDI influxs.

Bende-Nabende ( 2002 ) research proved that the long-run impact of FDI on GDP is important and positive for relatively economically less advanced economic systems but negative for the economically advanced states.

Aluko ( 1961 ) , Brown ( 1962 ) and Obinna ( 1983 ) study positive linkages between FDI and economic growing in Nigeria. Oseghale and Amonkhienan ( 1987 ) found that FDI is positively associated with GDP, reasoning that greater influx of FDI will spell a better economic public presentation for the state.

Das ( 1987 ) ; Din ( 1994 ) ; Balasubramanyam, Salisu and Sapsford ( 1996 ) , Borensztein, De Gregorio and Lee ( 1998 ) , FDI is introduced as the factor explicating positive impact on GDP growing through engineering transportation in add-on to human capital.

Dees ( 1998 ) submits that FDI has been of import in explicating China ‘s economic growing, while De Mello ( 1997 ) presents a positive correlativity between FDI & A ; GDP for selected Latin American states. Findingss of ( Xu, 2000 ) for US FDI in 40 states for the period 1966-94 besides support the determination of De Mello that engineering transportation from FDI contributes to productivity growing in developed states but non in developing states, which he attributes to miss of equal human capital. The OECD ( 2002 ) merely stated that FDI increases efficiency of resources and rises factor productiveness in the host state, so it sees the influence of FDI on growing as positive.

Adewumi ( 2006 ) in his research examines the part of foreign direct investing to economic growing in African states. Data for the full continent and information for 11 states within the continent were used for the analysis from 1970-2003. The states used for the analysis includes ; Angola, Botswana, Burkina Faso, Central African Republic, Cote vitamin D ‘ Ivoire, Egypt, Mali, Nigeria, South Africa, Tunisia and Republic of Benin. Eleven states were selected based on the undermentioned standards: growing rate, strong currency value, population and Geographical spread. It was discovered that the part of FDI to growing is estimated to be positive in most of the states but non important. GDP growing rate was used as a dependent variable while FDI growing rate was used as independent variable. Other variables that were considered for the survey include ; gross capital formation and net exports. From the analysis it was proved that the impact of FDI on GDP is estimated to be positive for most of the states. But in the other states where the consequence is non positive, did non bespeak that FDI ‘s impact on GDP is negative. The ground for this negative impact is that some impact of FDI in the host state can non be measured quantitatively, e.g. cognition acquisition, engineering and international image, and it may take a considerable clip before these variables affect growing.

Hasen and Giorgioni ‘s ( 2006 ) research has assessed the impact of foreign direct investing on economic growing of four AMU states including ; Algeria, Libya, Morocco and Tunisia1 – between 1990 and 2006. The variables under analysis includes ; entire end product, entire factor productiveness, domestic capital, foreign capital, labour input and human accomplishments. These states are chosen for analysis because as most other developing states they were the 1s which were Rs transitioning toward policies of pulling influxs of FDI which will present modern engineering and perchance excite export-led growing to assist them successfully finish the passage from a bid economic system to a more market oriented one and to cut down their dependence upon one or few trade goods. The consequences indicate that there is a strong relationship between economic growing and FDI. The influxs of FDI are an of import determiner of GDP growing. They analyzed that the positive impact of FDI on the economic system depends on its interaction with unfastened trade policy, macroeconomic stableness, better instruction degree and filling of engineering spread. They suggested that AMU states would make better by concentrating on human capital, developing domestic houses, making a stable macroeconomic model and productive investings to get down up the procedure of development

However, some economic experts have analyzed negative impacts of FDI on economic growing. Leff ( 1969 ) and Griffin ( 1970 ) have argued that the foreign investing could negatively impact the economic growing by replacing the domestic nest eggs. One of the chief statement against the influx of FDI is that transnational companies ( MNCs ) replace domestic houses, introduce unsuitable production engineering and make BOP crisis through transportation of net incomes from the host state ( Sahoo, 2006 ) . MNCs conveying FDI by and large have advanced engineering, accomplishments and resources through which they can gnaw the market portion of the domestic houses and can herd out the local investing ( Markusen and Venables, 1997 ; Agosin and Mayer, 2000 ; and Kumar and Pradhan, 2002 ) . These MNCs besides make usage of advanced engineerings in the production procedure which may take down the demand of labor. This phenomenon leads to higher rates of unemployment which may take down the economic development.

Carkovic and Levine ( 2002 ) concluded that FDI does non hold a positive impact on economic development. Mwlima ( 2003 ) besides concluded that the inducements that most African states are offering to pull the FDI end up in adding to the economic jobs taking to a state of affairs where the inducements being offered are countervailing any additions from FDI. He mentioned Zambia as a specific illustration. He claimed that the purpose of any MNC is to do net income instead than supplying economic development, hence the host states should be really cautious in explicating any policies to pull FDI.


Athukorala ( 2003 ) has examined the relationship between FDI and GDP utilizing clip series informations from the Srilankan economic system. The variables used includes ; Gross Domestic Product, Foreign Direct Investment, Domestic Investment and Trade Liberalization. Despite of the fact that FDI in Srilanka has increased dramatically since 1980 ‘s, the econometric consequences show that FDI inflow do non exercise an independent influence on economic growing. The way of causing is besides from GDP to FDI and non from FDI to GDP. The chief ground of this consequence is the political instability and perturbation, hapless jurisprudence and order state of affairs, direct and indirect regulative barriers, political & amp ; policy instability, ill developed substructure, low degrees of human capital and deficiency of transparence in trade policy of the state. He suggested the authorities of Srilanka that if the ultimate aim of the state is to pull FDI for development, poorness decrease and growing, so an appropriate policy mix is necessary to accomplish the aim.

Zhang ( 2004 ) tests the widespread belief about the good growing of Foreign Direct Investment in China. The arrested development estimates in the survey shows favourable consequence of FDI on economic development of China. The used variables include ; existent Output, Labor Input, Stock Of Domestic Capital and Stock of Foreign Direct Investment. Harmonizing to his analysis, FDI seems to lend positively to China ‘s economic development by raising productiveness, advancing exports and spreading engineering. The consequence of foreign invested endeavor in the Chinese economic system seems to increase with FDI influxs from 1992-2004. The analysis besides proves that the fringy merchandise of FDI seems to be larger than that of domestic investing.

Another recent research by Trevino and Upadhyaya ( 2003 ) utilizing clip series informations from five developing states of Asia found that FDI is positively related to economic growing and in an unfastened economic system, the impact of FDI on GDP is positive. The research suggested that influxs of foreign direct investing are a important factor that positively affects the economic growing of these five developing economic systems of Asia

Sjoholm ( 1999 ) studies that inter-industry spillovers from FDI are found at national degree in Indonesia where local constitutions in industries with a big foreign presence have shown high productiveness growing. His research demonstrates that the FDI accelerate economic development more than the domestic investing.

Agrawal ( 2000 ) conducted a survey to measure the economic impact of FDI on economic development in South Asia. He found that the impact of FDI influxs on GDP growing rate was negative prior to 1980, mildly got positive in early 1880ss and got strongly positive over the late 1880ss and early 1890ss. His survey besides supports the position that FDI is more likely to be good in more unfastened economic systems. He besides found that since 1980, FDI inflows contributed more to GDP growing in South Asia than did an equal sum of foreign adoption proposing that FDI is more preferred to foreign adoption.

Sahoo ( 2006 ) besides determined that ; one FDI has positive and important consequence on the growing of four major South Asiatic states, secondly FDI does non instantly impact the rate of capital formation but has kineticss affect on it over the period of clip and last it has a positive and important consequence on exports.

From the above literature it can be concluded that FDI stimulates the GDP growing on one terminal and substitutes the domestic nest eggs on the other manus. Consequently the positive or negative impact of FDI on GDP growing chiefly depends on the economic policies of the host state.

Since the impact of FDI on economic growing is non clear from either the theoretical and empirical positions and therefore necessitate to analyze in the instance of South Asiatic states ( Mehta, 2004 ) .


Initially Pakistan followed relatively restricted economic policies. In the period of 1990s authorities undertook a figure of steps to pull FDI and initiated market-based policies. The policy chiefly includes gradual liberalisation of trade and investing through recognition installations, duty decrease, revenue enhancement grant and moderation of foreign exchange controls ( Khan, 1997 ) . Restrictions on the influx and escape of capital were bit by bit lifted. Without any anterior blessing foreign investors were allowed to keep 100 % of the equity of industrial undertakings. Investment portions issued to non-residents could be exported, and remittal of dividends and disinvestments returns was allowable without any anterior permission of State Bank of Pakistan ( SBP ) . Some more restrictions were relaxed in the 1994 including ; limitations on some capital minutess were partly relaxed, foreign adoption was allowed and certain outward investings were allowed to some extent. Pak-rupee ‘s full convertibility was established on current international minutess. An interbank foreign exchange market was besides established leting market forces to play a greater function in exchange rate finding ( Khan, 2007 ) .

Initially Pakistan received really low sum of FDI because of the pre-reforms policies. Due to those restricted policies the flow of FDI was undistinguished boulder clay 1991. The FDI flow steadily increased in the station liberalisation period due to market based investing policies but the degree of FDI remained low as compared to other developing states. Actual influxs of FDI to Pakistan have increased from $ 119.6 million in the 1975-79 to $ 3299.8 1000000s in the 1995-99. The FDI influx increased from $ 469.9 million in 1999-2000 to $ 798 million 2002-03 demoing 65 percent addition and stood $ 3521 million in 2005-06. FDI reached to $ 1.5 billion in 2005, 61percent higher than in 2004.

Though the influx of FDI to Pakistan increased drastically, but this addition become undistinguished when compared with other South Asiatic states. The grounds for low degree of FDI influxs includes ; political instability, bureaucratic procedure, deficiency of substructure installations, macroeconomic instabilities, inconsistent economic policies of consecutive authoritiess, holds in the denationalization of state-owned endeavors, differences between foreign investors and the authorities, jobs of rational belongings, and deficiency of transparence applications of authorities ordinances ( Khan, 2007 ) .

Pakistan has a batch of possible to pull FDI. Although the lifting tendencies of FDI reflects the success of the policy. However FDI is well hindered due to the above mentioned grounds. The current research chiefly focuses on the impact of FDI on GDP of Pakistan in the recent times to see whether FDI plays any function in economic development and more work should be done to pull FDI or non.

Chapter 3: Methodology

Assorted researches have been conducted throughout the universe in order to understand the impacts of foreign direct investing ( FDI ) on the economic growing. In Pakistan besides many research workers have tried to happen out the impact of FDI on economic development.

De Gregorio ( 2003 ) & A ; Bosworth, Collins and Reinhart ( 1999 ) analyzed the impact of assorted signifiers of FCI on GDP. Loungani and Razin ‘s ( 2001 ) concluded that out of the assorted signifier of FCI, FDI was discovered to be the most resilient Khan, Hassan & A ; Malik.etl ( 1992 ) and Shabbir & A ; Mahmood ( 1992 ) estimated the impact of FDI on domestic nest eggs in Pakistan from 1950 – 1988. Shabbir & A ; Mahmood ( 1992 ) , Khan & A ; Rahim ( 1993 ) analyzed the impact of FDI on GDP growing rate. Ghulam, Mohey-ud-din ( 2004 ) checked the impact of FCI on economic growing in Pakistan. Khan Arshad ( 1997 ) studied the impact of FDI on GDP growing, sing the function of fiscal sectors. Ahmad, Alam and Butt.etl ( 2003 ) checked the impact of FDI on exports and domestic end product.

It is hard to analyse the impact of foreign direct investing on all the sectors and variables in a individual thesis. Therefore, the current research narrows down its analysis merely to the impact of FDI on GDP growing as per the hypothesis of the research. Merely two variables i.e. FDI and GDP are under consideration for research intent. FDI is taken as an independent variable ; GDP is taken as the dependant variable.

The literature has extensively accepted that FDI is a really important fiscal beginning for carry throughing saving-investment spread and Balance of Payment spread ( Ghulam, 2007 ) . It brings in complimentary capital and engineering necessary for rapid growing every bit good as it provides entree to planetary production and selling webs ( Mehta, 2006 ) . It is a really cardinal beginning of non-debt influx to the place state ( Bajpai & A ; Sachs, 2000 ) . FDI helps in speed uping economic growing non merely through capital influx, revenue enhancement gross and employment coevals but besides through acceptance of advanced engineerings, improved managerial accomplishments, modern production and selling accomplishments and planetary exposure ( Sjoholm, 1999 ) and ( Zhang, 2001 ) . This transportation of accomplishments and engineering does non happen automatically but depends on the host state ‘s absorbent capacity to supply targeted benefits ( Borensztein, 1998 ) .

Sing the importance of this subject from the above literature, this current research has developed this hypothesis.


“ FDI has a positive impact on GDP ” .


The trial this hypothesis, the current research is based on 32 one-year observations over the period of 1976 to 2007. Based on the old literature of Ghulam ( 2007 ) , economic growing is expressed in term of current GDP and FDI is taken as current net influx of FDI in Pakistan.

Table 1: Foreign Direct Investment and GDP in Pakistan ( 1976-2007 )


GDP ( Current US $ in

FDI ( Current US $ in


Millions )

Millions )




































































































All the variables are expressed in logarithmic signifier. Datas on above mentioned variables is taken from the “ World Bank Development Indicators ” . As this beginning is non available publicly, so the service of State Bank of Pakistan has been used to roll up the informations on above variables from World Bank.

So to gauge the impact of FDI on GDP in Pakistan, arrested development will be run on FDI and GDP informations for 32 old ages ( 1976-2007 ) . The ‘Multiple Linear Regression theoretical account ‘ will be used in this research. The Multiple Linear Regression Model is given as:

Log GDP = log FDI ( Eq. I )


GDP = Current Gross Domestic Product

FDI = Current Foreign Direct Investment, net influx

The consequences of the Model ( as shown in Eq. No. 1 ) are estimated as:

Log GDP = 17.138 + 0.384 log FDI

Other estimated consequences and statistics are given in the following chapter.

Chapter 4: Interpretation OF RESULTS

Table 2: Good of Fit Test



R Square

Adjusted R Square

Std.Error of Estimate






The theoretical account drumhead tabular array studies the strength of the relationship between the theoretical account and the dependant variable. R, the multiple correlativity coefficients, is the additive correlativity between the ascertained and model-predicted values of the dependant variable. The value of Multiple Coefficient of Correlation or R is 0.960. It means that there is 96 % correlativity between GDP and FDI. Its big value indicates a strong relationship between the two variables.

R2 or Coefficient of finding is 0.922 which means that in this theoretical account FDI can foretell 92 % of the discrepancy in GDP. The theoretical account shows higher values of both R & A ; R2 whereas the standard mistake of the estimation is 0.17015 which is well low.

Table 3: Overall Significance of the Model ( ANOVA/F-Statistic )


Sum of Square




Arrested development








The ANOVA tabular array tests the acceptableness of the theoretical account from a statistical position. The Regression row shows information about the fluctuation accounted for by your theoretical account. The Residual row shows information about the fluctuation that is non accounted for by your theoretical account. The arrested development and residuary amounts of squares are about equal, which indicates that about half of the fluctuation in GDP is explained by the FDI. The value of the F-Statistic is 356.224 important at lower than 1 % every bit shown as 0.000 in the above tabular array. So as per the above consequences of ANOVA, the theoretical account is statistically important.

Table 4: Arrested development Coefficients



Unstandardized Coefficients











( invariable )











The above tabular array shows the coefficients of the arrested development line and related statistics for the theoretical account including I? Coefficients of the arrested development equation and their degree of significance. The coefficients estimation for FDI is positive and important even at 1 % degree of significance.

From the arrested development analysis, a unit addition in log FDI is estimated to do the GDP growing to increase by 0.384 per centum points. The value of the I?1 is 0.384 which shows strong positive impact of the FDI on the GDP growing in Pakistan during the period of 1975-2009. Therefore, the estimated consequences of the theoretical account demonstrate that that there is a strong positive impact of the FDI on the GDP.


This paper analyses the function played by FDI in economic development of developing states. Using clip series informations of Pakistan economic system from 1976-2007, it has been proved in the current research that, FDI positively helps in speed uping the GDP growing. Statistically it has been found out that there is a important and positive impact of Foreign Direct Investment ( FDI ) on Gross Domestic Product ( GDP ) of Pakistan as discussed in chapter 4. This research found out that both variables are extremely correlated and 92 % discrepancy in GDP is explained in FDI. The Anova tabular array accepted the theoretical account statistically and gave the value of the F-Statistic to be 356.224 important at lower than 1 % and the arrested development coefficients are besides important as shown in methodological analysis subdivision. FDI is considered to be one of the cardinal beginnings of carry throughing saving-investment spread, BOP spread and is one of the fastest manners of engineering transportation from advanced states.

In Pakistan FDI has increased dramatically since the 1991s i.e. after the station reform period. Pakistan managed to pull higher degree of FDI than of all time before due to its market oriented investing policies. Actual influxs of FDI to Pakistan have increased from $ 119.6 million in the 1975-79 to $ 3299.8 1000000s in the 1995-99. The FDI influx increased from $ 469.9 million in 1999-2000 to $ 798 million 2002-03 demoing 65 percent addition and stood $ 3521 million in 2005-06 ( Khan, 2007 ) . But due to the incompatibility of authorities policies, the degree of FDI remained low as compared to other developing states.

The ground for this low degree of FDI in Pakistan is that the investing environment in Pakistan has non improved due to assorted grounds including ; jurisprudence & A ; order state of affairs, regulative barriers, political instability and the implied policy instability, hapless substructure, low degrees of literacy and investing in human capital, deficiency of transparence in the trade policy, favoritism against non- export oriented sectors like plantations, high loaning rate and the war against terrorist act ( in the first topographic point this has diverted the state ‘s resources and besides this created uncertainness and hazard which deter investing ) , are found as the major restraints to FDI flows in Pakistan.

It can be concluded that handiness of better stock of human capital, sound macro economic policy, institutional stableness are necessary stipulations for FDI-driven growing to happen. And the benefits from FDI can merely be enjoyed and enhanced once the stipulations are met. And if the authorities is truly looking frontward to pull more FDI so an appropriate policy mix is a must.

Some surveies have highlighted the negative facets of FDI as good. But merely one point demand to be considered that some impacts of FDI in the host state can non be measured quantitatively, e.g. cognition acquisition, engineering and international image, and it may take a considerable clip before these variables affect growing.

For farther surveies, it is really of import to work on the determiners of FDI. This will assist the host state in making its prep before explicating any policy to pull more FDI. It will besides be interesting to analyze how FDI inflow contributes to development of specific sectors e.g. agribusiness, excavation etc would increase the cognition of FDI and indicate in which sector it is truly needed and will profit more. Another of import country would be to analyze the relationship of FDI & A ; trade and FDI & A ; domestic investing. To look into the impact of FDI on Tax gross which is the critical beginning of gross for the authorities can besides be an of import country


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