W. Krugell (2001) researched on the determinants of foreign direct investment in Africa. The research is of critical significance to this study as most of the African nations are underdeveloped countries just like Pakistan, and also because important FDI determinants from a macroeconomic point of view have been pointed out in this study by conducting a time series analysis on sub-Saharan countries. The study talks about the importance of rising internationalization and the obvious benefits from relocating to cost effective and resource friendly countries and then goes on to pin point specific factors that influence FDI inflows. According to the research, economic growth (GDP), domestic investment and macroeconomic stability are the most important factors in attracting foreign direct investment in a country. Other important influencers are market size & growth, average labor costs, host government policies, tariffs and trade barriers, exchange rates, inflation rates, budget deficits, political instability and infrastructure. Though the research focuses upon geographically close countries, they are known to be significantly different in terms of their structure. This means that the research would hold a lot of external validity. Therefore, the knowledge derived from this particular study would be of immense importance when framing the theoretical framework of my study.
Ramasamy and Yeung (2010) studied the determinants of foreign direct investment in the Services sector. The objectives of the study were purely academic and the findings were planned to be universally applicable. The research was carried out by studying the relationship between different macroeconomic variables and FDI in services in OECD countries. The basic idea was to highlight the fact that the drivers of FDI in services are not always similar or equal to the drivers of FDI in goods. Therefore, there is a need to actively research in this particular niche of FDI, mainly because the total flows of FDI in services are 2/3 of the world overall flows of FDI. The study points out four basic drivers which attract FDI inflows into a country. They are: market seeking, resource seeking, efficiency seeking and strategic asset seeking. Additionally, the study finds out that foreign direct investment in the manufacturing sector is a key stimulant of FDI in services. Additionally, increased liberalization of government policies and privatization of the public sector almost always leads to higher FDI inflows. Another important finding is that though the average cost of labor is important in determining FDI inflows in the manufacturing sector, it is the quality of labor that determines FDI inflows in the services sector. It is recommended in the article that governments should focus more on attracting manufacturing FDI, which in turn would automatically result in higher levels of services related FDI as has already been discussed.
Iqbal S.(2010). This particular paper investigates the cause-effect relationship between FDI, international trade and economic growth in Pakistan by using the Vector Auto Regression (VAR) method. The second part of the research summarizes the facts of FDI, trade and economic growth in Pakistan after the restructuring in 1986. The study states that Pakistan has worked its way from being a centrally planned economy towards a market economy, and as a result seen drastic improvements in economic growth steamed by massive FDI inflows, especially in the post 2000 era. Also, high rates of economic growth combined with increased purchasing power has stimulated demand for goods and services which cannot only be met by local investment. Additionally, the study finds conclusive positive relationship between exports and FDI. Overall, the research plays an important role in identifying strong bondage between economic growth, internal trade within an economy and foreign direct investment. Although, the results from the study are not particularly surprising or new, the statistical significance of this study would still be a lot of use whenever studying foreign direct investment in Pakistan.
Az´emar C. (2007) researched on the importance of tax sparing policies by governments in determining FDI inflows. The study starts by acknowledging that most experts feel that changes in fiscal policy has little impact upon FDI inflows, although this may not always be the case. Their basic argument is that taxation levels of a country majorly impact foreign direct investment as it is an integral part of the economic environment of the country. The researcher focuses upon the FDI outflows from Japan into 26 developing countries from 1989 to 2000, trying to map out exact fluctuations in FDI as a result of changes in aggregate tax levels in those countries.
The results are quiet enlightening. FDI inflows in tax sparing countries were found to be almost three times more than FDI inflows to non tax sparing countries, which obviously is a huge difference. Sure there would be a lot of intervening variables, however the difference in inflows is still to dismiss tax sparing provisions as an important driver of foreign direct investment into developing countries. Additionally, the regressions indicate that a 1% higher effective statutory tax rate decreases Japanese FDI flows by 2.6-3%, clearly showing that firms hold tax rates in a potential investment destination as a key strategic decision point.
Also, it should be noted that the effects of tax sparing provisions estimated in this paper have only been researched on developing counties, and this relationship might not hold true of already well developed nations where other factors like market size and quality of labor might override purely cost based factors like tax rates.
Azam M. (2010). The aim of this particular study is to investigate the effects of different economic variables on foreign direct investment for three countries, namely Armenia, Kyrgyz Republic and Turkmenistan. The methodology of the study is simple yet effective. Secondary data from 1991 to 2009 has been taken from World Development Indicators (World Bank). Also, simple econometric model in log form and the least squares technique have been used for statistical relationship building.
Result found in the study indicate positive effects of market size, official development assistance on FDI and negative effect of inflation on FDI. However, in case of Armenia, the effect of official development assistance on FDI has been found relatively insignificant, whereas in the case of Kyrgyz Republic, the effect of
inflation on FDI has been insignificant. Therefore, findings of the study recommend that market size and official development assistance needs to be encouraged and inflation needs to be managed in order to achieve higher levels of FDI and accelerate the process of economic development in these countries. As these countries are developing nations like Pakistan, the findings have a lot of external validity especially when considering the case of Pakistan.
Yousaf, Hussain and Ahmad (2008) researched on the impact of foreign direct investment in Pakistan, its importance in supporting the Pakistani economy and the factors that influence FDI in Pakistan. However, the core function of the study was to analyze the impact of FDI on Pakistani imports and exports through the collected time series data. The study applied the Unit Roots test to check the stationarity of the data series used in the analysis. Additionally, cointegration technique was used to analyze the long run relationship among the variables, and error Correction Model was used for further analysis. It would be safe to say that the study had strong statistical value attached to it, and therefore the results can be expected to be highly trustworthy.
It was found out that FDI positively impacted real demand for imports both in the short run and in the long run. In case of one percent increase in FDI, real demand for import rose by 0.08 percent in the short-run and 0.52 in the long run. On the other hand, the results of export model showed that FDI has negative relation with real exports in the short-run and positive relation in the long run. The export model estimations indicated that with one percent increase in FDI, real export declined by 0.08 percent in the short-run and increased by 1.62 percent in the long run. Therefore, since the effects of FDI inflows are fairly positive in terms of international trade, policy makers in Pakistan should focus on actively targeting international investors to help revive the economy and improve the current economic situation of Pakistan.
Qureshi (2005). The objective of this study is to highlight major issues related to FDI with reference to South Asian countries and make some policy recommendations on the way forward. The methodology of this paper is purely theoretically and heavily based on generic facts and figures. The research indicates towards privatization as the sole significant driver of FDI inflows in Pakistan and outlines the financial year of 2004-2005 as purely magical in terms of FDI inflows (FDI inflows doubled from $1.1 Billion to $2.2 Billion from 2004 to 2005). The article states that in spite of uncertainties caused by high oil prices, rising global interest rates and growing global BOP imbalances, FDI inflows to developing countries rose during the first part of the previous decade (2000s).Private debt flows to developing countries rose to an estimated $192 billion, up from an earlier figure of $85 billion in 2003.
The primary determinants of this surge in FDI inflows were abundant global liquidity, steady improvement in the credit ratings of these countries, lower yields in developed nations and expansion of investor interest in emerging market assets.Additionally, intense globalization and increased competition lead to aggressive relocation of multi national companies to cost effective destinations.
Ashfaque (1997) analyzed various factors which were responsible for the low levels of FDI investment at the time of his research. The basic factors outlined were low levels of economic growth, high political instability, huge macro economic imbalances and inconsistent economic policies. Additionally, slow bureaucratic processes, inappropriate business environment and inadequate infrastructure also played an important role in keeping away foreign investors. Other factors outlined by the author include the lack of trained labor, over protective labor laws and social/cultural taboos. Also, the study categorically points out that no amount of fiscal or economic stimulants can encourage FDI inflows into a country unless the very basic components of a country's overall environment are in order.
This research again is based upon a purely academic base, however its significance lies in effectively listing and commenting on the various variables that negatively influence FDI into Pakistan. While making the theoretical framework for this study, all these determinants could be of obvious importance.
Braga & Jorge (2000) shed light on the determinants of foreign direct investment in developing countries. The study uses an econometric model based in panel data analysis for thirty-eight developing countries for the period 1975-2000. It has been found that FDI is correlated to the level of schooling, degree of openness of the economy, risk and variables related to macroeconomic performance like inflation, risk and average rate of economic growth.
The results also show that the FDI is closely associated with stock market performance, and investors take stock indices as trustworthy indicators of a country's current economic potential and future growth. Also, after performing a causality test between FDI and GDP the study shows concrete evidence that increases in GDP invariably lead to increases in FDI, but not vice versa. The degree of openness was included in the study as a proxy to reflect the willingness of a country to accept foreign investment, which proved to be important in attracting capital.
Additionally, inflation had more of a value as a good indicator rather than being a purely cost related determinant. The study found it to be a key determinant of a country's macroeconomic stability, thereby significantly affecting FDI inflows.
Aqeel (2005) identifies the determinants of growth in foreign direct investment
in Pakistan over the period 1961 to 2003. The main aim of the study is to research on how different variables or indicators related to trade, fiscal and financial sector liberalization attract FDI in Pakistan.
The study uses Cointegration and error-correction techniques to identify the variables in explaining foreign direct investment inflows into Pakistan. It considers tariff
rates, foreign exchange rate, tax rate, credit to private sector and index of stock exchanges to be critical factors in explaining the inflow of foreign direct investment into Pakistan. All variables listed above indicated correct signs and are statistically significant except for wage rate and share price index, according to the findings of the study. The study particularly emphasizes on the role of these policy variables in attracting FDI and determining its growth in both short and long run in Pakistan. Additionally, it also indicates a positive and significant impact of structural economic reforms on FDI in Pakistan, both fiscal and monetary.
Theoretical Framework
Dependant Variable:
Foreign Direct Investment Inflows (FDI, Inflows)
Independent Variables:
GDP Growth Rate
GDP, Nominal
GNP per captia
Inflation Rate
Exchange Rate (Rs. Vs USD)
Avg. Tax Rates
Avg. Rarrif
HDI Index
KSE Index
Average Cost of Labor
Interest Rate (State Bank)
Population
Country Exports
BOP Deficit
Government Subsidies, Avg.
