


































In ternationa l
Scholars
Journa ls

                                                                                                               
African Journal of Agricultural Marketing ISSN: 2375-1061 Vol. 2 (9), pp. 160-170, September, 2014. Available online at 
www.internationalscholarsjournals.org © International Scholars Journals 

 

Author(s) retain the copyright of this article. 
 
 
 
 
 

Full Length Research Paper 
 

Substantial factors that can influence the Economic 
growth of Pakistan 

 

*Benazir Ali Bhutto, Malik Mian Hussain and Moeen Mazari 
 

Department of Economics, Al-Hamd Islamic University, Quetta, Pakistan. 

 
Accepted 17 July, 2014 

 
How Economic Growth can be stimulated? This question has called the attention of every policy maker 

and economist to find the answer. What factors can affect the economic growth? The answer of this 

question is unclear so far. After the endogenous growth theory as given by Romer (1986, 1990), Lucas 

(1988) and Grossman and Helpman (1991) Knowledge is being considered as an important and 

endogenous determinant of Economic growth. The latest knowledge (Technology) is essential for 
developing countries to catch-up with developed economies. Economic liberalization refers to both 

trade liberalization and financial liberalization. Trade liberalization means reduction in trade restrictions 

like tariff, quota or other trade barriers which discourage the international trade. On the other hand, 

more capital inflow and outflow as a result of Foreign Direct Investment (FDI), portfolio investment or 

worker remittances show that the country is financially integrating with rest of the world. How the 
economic liberalization affect the Economy of any particular country. Whether this economic 

liberalization is good or bad for developing country has become a huge policy debate. 
 

Key words: Technology transmission, Liberalization, R&D Spillovers, Foreign direct investment (FDI). 
 
 
INTRODUCTION 
 
Almost all developing economies face the scarcity of 
technology. Technology is very essential to enhance the 

productivity of factor of production and economic growth. 
That‟s why developing countries have low economic 

growth than developed countries, because the developing 
countries spend less on research and development while 

developed countries heavily spend on R & D. Further-
more, high concentration of technology is in the hands of 
developed counties. According to the Global Competitive- 

 
 

 
 
 

*Corresponding Authors. Email: Bhuttoli7@gmail.com 
 

 

 
 

 
 

ness Report 2011 to 2012, Pakistan ranks at 93 number 
in term of Availability of latest technology index while 

India ranks at 47, Turkey 52 and Sri Lanka 63. These  
figures clearly show Pakistan‟s weak R&D base as 
compared to countries of her region. So dependence on 

foreign source of Technology is very crucial and important 
for Pakistan. Similarly, World Economic forum which have 

ranked all the counties to see at what extent business of 
a country can absorb new technology. According to report 

(2011 to 12), Pakistan‟s rank is 92 while India`s rank is 
41, Sri Lanka`s 42 and Turkey has ranked at 44. The 
index which evaluates the capacity of FDI for the 

transmission of new technology into a country has ranked 
Pakistan in the rank of 121, India in 38 and Sri Lanka in 

45.  There  are many channels through which Technology



Benazir et al.          160 
 
 

 
can be transferred from developed countries. The direct 
import of Technology embodied machinery and interme-
diate goods is one channel of transmission of Technology. 
Foreign direct investment by multinational companies 
(MNCs) is another source of international Technology 
transmission. The MNCs import not only Technological 
modern machinery but also the Ideas and knowledge 
generated through R & D carried out in parent country. In 
addition there is movement of employees or managerial 
talent from developed economies to low and middle 
income economies when these countries open their 
economies. Kortum (Many studies have identified the 
different channels of technology transformation like Eaton 
1996) considered licensing agreements as a direct 
channel of transfer but according to World Investigation 
Report (2010), the licensing agreement cannot bring the 
valuable and latest technology.  

To absorb the foreign technology brought by foreign 
investors, the absorption capacity of host country matters 
a lot. Most studies use an appropriate level of human 

capital as a measure of absorption capacity
1
. Because, 

without minimum level of skill or knowledge (absorptive 
capacity), local firms cannot get knowledge benefit of 
technology transmission via foreign direct investment 

(UNCTAD, 2010).
2
 To absorb the foreign technology 

brought by foreign investor, the absorption capacity of 
host country matters. Most studies use level of human 

capital as measure of absorption capacity
3
. The negative 

relationship between foreign direct investment and 
economic growths indicates the lack of high skilled labor 
force and basic infrastructure to absorb the foreign tech-
nology which comes through foreign direct investment. 
This lack of capabilities and inefficiencies in technological 
learning prevent spillover impact of MNC‟s on economic 
growth of Pakistan. As without minimum level of skill or 
knowledge (absorptive capacity) the local firms cannot 
get knowledge benefit of technology transmission through 

foreign direct investment (UNCTAD, 2010).
4
 Many studies 

have shown that foreign sources of Technology are 
important contributor to productivity growth for the 
developed economies. Less developed economies spend 
less on R & D and face scarcity of modern Technology. 
The import of Technology or trans-mission of Technology 
from developed countries is a key question for their 
economic growth. There is a lot of controversy regarding 
the Technology transmission whether it is good or bad for 
developing countries. Some Economist argues that more 
open economies have more ability to absorb technology 
generated in advanced countries. Some economist like 
Coe and Helpman (1995) showed that transmission of 
technology and related knowledge from developed 
counties to developing countries through export and 

 
1 Nelson and Phelps (1966), Benhabib and Spiegel (1994). 

 

2 United Nation Conference on Trade and Development, 2010. 
 

3 Nelson and Phelps (1966), Benhabib and Spiegel (1994). 
 

4 United Nation Conference on Trade and Development, 2010. 
 

 

 
 
 
 
import will be more effective in economies with better and 
advanced education.  

Several economists favor the hypothesis of “learning by 
exporting”. There is a lot of literature which shows that 
exporters are more productive on average as compared 

to non-exporters
5
. The question is whether the productivity 

increases because of “learning by exporting” or pro-
ductivity leads to more export? Most evidences are in the 
favor that when any country starts exporting, the firms of 
that country get benefit from interacting with customer of 
the world. These customer demand higher quality pro-
ducts and in this way impose condition to produce higher 
standard products as compared to domestic customer 
demand. After entering into the foreign markets, firms gain 

new knowledge and latest technical expertise which 
facilitate to improve their efficiency level. Other positive 
contribution of economic liberalization through trade 
openness to growth can be that liberalization increases 
specialization and division of the labor thereby improving 
productivity and export capability. Expansion production 
of exportable products can lead to production growth by 
adoption and transmission of modern method of 
production. Many theorists also are in the view that gains 
from trade can be in the form that the reduction of trade 
restriction increase the economic efficiency by making 
consumers and producers able to buy items at lowest 
cost. Openness is an important issue but little research 
has been done on the significance of inter-national 
Technology transmission for the low and middle income 
economies like Pakistan.  

Trade and investment policies of Pakistan are fairly 
liberal since the late 80s the average tariff rate come 
down to just 20% in 2001 to 02 which is only half as 
compared to the mid-1990s. In the foreign investment 
policy 1997 Pakistan has opened most sectors of 
economy to FDI, by giving 100% foreign ownership 
except some conditionality like the provision of national 
treatment to foreign companies by following the WTO 
obligations by giving some incentives such as duty and 
tax exemptions and some other concessions. Pakistan 
has taken many steps for inward FDI but is not able to 
attract large FDI. FDI is very important for Pakistan but it 
has played a small role in Pakistan economy. In most 
year of the ratio of FDI to GDP is less than 1%. After 
independence FDI was very crucial for the success of 
both import substitution and infant industry.  

According to the latest ranking year 2011 given in Table 

1, China is the major trade partner of Pakistan by 
replacing US which remain largest trade partner and now 

is at third position in the list of top ten trade partners of 
Pakistan. On the other hand Japan is not in this list. This 
shows that Pakistan‟s dependence on American and 

European markets is declining and trade within the Asia 
is increasing. In recession of 2008 to 09, Asia has helped 

to save the world because of huge markets  provided  by 
 
5
 (Bernard and Jensen 1999) 



161          Afr. J. Agric. Mark. 
 
 
 

Table 1. latest ranking year 2011. 
 

 
Countries 

Bilateral Trade in the year 2011 (US Dollar) 
 

 
Bilateral Trade Exports Imports  

  
 

 China 7.423bn 1.634bn 5.789bn 
 

 UAE 7.284bn 1.808bn 5.476bn 
 

 USA 5.767bn 3.957bn 1.810bn 
 

 Saudi-A 4.975bn 428m 4.547bn 
 

 Kuwait 3.425bn 95m 3.330bn 
 

 Malaysia 2.626bn 166m 2.460bn 
 

 Afghanistan 2.509bn 2.337bn 172m 
 

 Germany 2.210bn 1.272bn 938m 
 

 India 2.007bn 264m 1.743bn 
 

 UK 1.835bn 1.206bn 629m 
  

Source: Basic Data Federal Bureau Statistics, Government of Pakistan 
 
 
 
the Chinese and Indian economies. The phenomenal 
economic growth of India and China has shifted the 
direction of Pakistan‟s exports and imports from American 
and European markets to the Asian markets. After the 
great recession of 2008 to 09 and global financial crisis, 
non-western nations had felt the need of minimizing 
dependence on dollar as a medium of trade. China has 
signed Local Currency Swap Agreements (LCSA) with 14 
countries including Pakistan from 2008 to 2011. After the 
US and EU sanctions on Iran, there are more currency 
swaps agreements in Asian countries. Pakistan has 
signed currency swap agreement with Turkey in 
November 2011 and with China in December 2011. 
Currency swap agreement with Iran is in the final stage 
and this is also expected with Malaysia, Russia and some 
central Asian states. This would help to boost the trade 
within the region. These new opportunities have been 
opened in Asia and Middle Eastern countries for Pakistan 
to boost economic growth by exporting to these markets 
and by importing the capital goods from these 
economies. Business experts believe that Pakistan‟s top 
bilateral trade partners are changing because of average 
better growth in Asia than in Europe and America and 
economic miracle of China. Chinese investment projects 

are increasing in Pakistan
6
. At the same time, our imports 

are increasing from India because Pakistan has given the 
status of most favored Nation by removing non-tariff 
barriers. Pakistan‟s trade with India and China is in 
deficit. Pakistan has potential to improve its trade relation 
with Asian countries and can increase export to these 
economies because of similarities of consumers in tastes 
and priorities. In the list of top ten largest trade partners 
of Pakistan, seven are from Asia. Pakistan can import 
machinery and other technological goods from these 
economies at low transportation cost as compared to 
American and European economies. 

 
 
 
Pakistan is also one of those countries which allocate 
very minor amount on R & D and faces scarcity of 
Technology, so foreign sources of technology are very 
important for Pakistan. Main focus of this study will be to 
examine the long-run and short- run impact of 
Technology (knowledge) transmission on Economic 
growth of Pakistan by using bounds testing approach to 
co integration within an Autoregressive Distributed Lag 

(ARDL)
7
 and thereby the importance of several channels 

of Economic liberalization like the direct import of 
technological machinery and intermediate goods, export 
of goods and services and transformation of modern 
technology, ideas, knowledge and managerial talent from 
developed economies through MNCs for Economic 
growth of Pakistan. The outline of this research is as 
follows. The second section will provide the com-
prehensive review of the literature. The third section will 
present the empirical analysis which includes model 
specification, Econometric specification result discussion 
and Sensitivity Analysis. The fourth and final section will 
provide the conclusion and policy recommendation. 

 
OBJECTIVES OF THE STUDY 
 
This research has been conducted for identifying different 

channels of foreign technology transformation and their 

impact on economic growth of Pakistan through long-run 

and short-run empirical investigation. Moreover, we aim to 

give policy suggestions for the promotion of Technology 

Transformation and effective use of this technology by 

developing absorption capacities of Pakistan. 
 
LITERATURE REVIEW 
 
Caves (1974) discovered that there might be two different 

 

 

6
  “President of the federation of Pakistan Chambers of Commerce and 

                7
   Pesaran et al, (2001) 

 

Industry” 
  



Benazir et al.          162 
 
 

 
impacts of foreign knowledge spillovers that had 
competitive effect and technology diffusion effect. The 
result of this study confirmed that in industry where the 
proportion of output produced by foreign owned firms was 
higher, the domestic owned firms had higher value added 
per worker. This finding supported the view that firms had 
taken benefit of foreign knowledge or technology and it 
had increased the efficiency of domestic owned firms. 
Barro (1991) examined the relationship between exports 
and economic growth by using the data of Middle East 
and African countries. The simple ordinary least square 
regression was used. The results showed that there was 
positive and significant correlation between exports and 
economic growth. The major shortcoming of this study 
was that this had not shown the direction of relationship 
that is, either relation was from export to growth or from 
growth to exports. Eaton and Kortum (1996) had shown 
that international licensing agreements as a direct way to 
transfer foreign technology but according to world 
investment report 2000, technology transfer through this 
source was not important because it did not contain 
modern technology.  

Edwards (1998) checked the relationship between 
trade liberalization and total factor productivity (TFP) by 
using indexes of openness. He used the data of 93 
developed and developing countries and estimated 18 
growth equations by using random effect model. From 
these estimates he computed TFP and then regressed 
TFP on income, initial labor and openness indicators. The 
results indicated that all the coefficient of openness had 
expected signs and in most of cases it is significant. The 
coefficient on initial labor force was significant and 
positive while of initial income it was negative. He 
concluded that trade openness had positive effect on 
economic growth. Xu and Wang (2000) examined the 
impact of Trade and Foreign direct investment as 
channels for technology transmission from industrialized 
countries to less developed countries. They also checked 
impact of this technology on TFP of these countries. The 

sample of 21 OECD
8
 countries for the period from 1971 

to 1990 was used. Three channels, capital goods trade, 
inward FDI and out ward FDI were considered for tech-
nology transmission. Ordinary least squares with white‟s 
hetero scedasticity consistent covariance estimation 
method were used to the Cobb-Douglas production 
function to estimate the required results. The results 
showed that the technology which comes through the 
imports of capital goods had a sizeable positive effect on 
a country‟s total factor productivity. That was strong 
empirical support for the trade as channel of foreign 
technology diffusion. To examine the role of FDI a sample 
of 13 OECD countries for the period of 1983 to 90 was 
used. The results showed the outward FDI brings 
technology back to the home country through the 
multinational enterprises. There were some short comings 
in this study. For example Cobb-Douglas production 

 

 
 
 
 
function does not take into account the endogeneity 
problem in the variable. There was need to develop 
theoretical justification for methods used and also more 
attention should be paid to econometric issues. 
Chakraborty and Basu (2002) examined the causality 
from GDP to FDI in Indian economy by using co-
integration and error-correction models. Results showed 
that causality run from GDP to FDI rather from FDI to 
GDP in the Indian economy.  

Hoekman et al. (2005) provided the theoretical analysis 
on Technology Transmission from developed to deve-
loping countries. This study has identified four major 
channels of foreign technology transformation which are 
trade in products, trade in knowledge or transmission of 
techniques and methods of production, foreign direct 
investment and fourth one is movement of people from 
one country to another. This study argued that Tech-
nological goods imported form developed counties are 
associated with higher total factor productivities (TFP) in 
developing country so there is recommendation for liberal 
trade policies. This study has developed certain type of 
policies recommendation on the basis of this argument as 

a guide for both home policy makers and also for WTO
9
 

trade related rules. Husain (2005) analyzed the impact of 
trade liberalization policy on Economic growth of Pakistan 
for the period from 1972 to 2002. He used the Johansson 
Co-integration test to check the long run relationship 
between trade liberalization and Economic growth of 
Pakistan. The volume of trade that is, imports plus 
exports were used as proxy for trade liberalization and 
other variables are population and investment growth. 
The stationary of the variables was checked by using 

ADF
10

 test and all the variables were found to be 

stationary at first difference which gave support to use 
Johansen Co-integration test to check the long run 
relationship between trade liberalization and Economic 
growth. The result showed that trade liberalization has a 
negative impact on Economic growth in long run, which is 
1% increase in trade volume lead to 0.19% decrease in 
GDP growth of Pakistan. When total trade volume was 
used separately in total exports and total imports, the 
positive but insignificant results were found. All this 
showed that there was no clear cut answers to the 
question whether trade liberalization positively affect the 
Economic growth or negatively.  

Narayan and Smyth (2005) have examined the impact 

of trade liberalization on economic growth of Fiji by using 
Cobb Douglas production function with making little 

modification in order to take into account the impact of 
political instability and trade liberalization from 1986 to 
2000. A recently developed Autoregressive Distributed 

Lag (ARDL) bounds testing approach was used to 
estimate the model. They used taxes on trade as a 

variable of openness and dummies for political instability. 

 
  9

 World Trade Organization  

  
 

8
 “Organization for Economic Co-operation and Development” 10

 Augmented Dicky-Fuller 
 



 
 
 
 
Long-run results were consistent to the theory and 
showed that there is a co integration relationship amongst 
the exogenous and dependent variable. But the coefficient 
of labor force was negative. Investment and human 
capital have positive signs and statistically significant at 
10% of level of significance. The dummy variable which 
was used to capture the impact of political instability of 
Fiji had negative sign and significant at 1%. This is 
consistent with the view that political instability has bad 
impact on economic activities in the country. The exports 
variable in the long-run have positive sign but insignificant 
and in the short-run the results are ambiguous. Also the 
results of tax on trade which measure the degree of trade 
openness are not clear cut. The weak relationship of 
exports and investment with GDP is alarming for Fiji. It is 
necessary for Fiji to raise investment to about 20 to 25% 
in order to achieve 5% target of GDP growth rate. Driffield 
and Henry (2007) examined the importance of absorptive 
capacity and institutional quality of host country for 
making the foreign technology more effective for the 
economic growth of host country. The absorptive capacity 
of foreign technology is measured by the level of human 
capital which is the average level of schooling for the 
population of 25 years and above. Institutional quality is 
measured by two ways. First was measured by index of 
legal structure and property rights and secondly it was 
measured through quality of bureaucracy. The threshold 
regression analysis has been used to get the results for 
the group of 57 developing countries over the period from 
1970 to 1998. The results of this study showed that in the 
case of trade as a channel of foreign technology the 
institutional quality is more effective for growth effects, 
while in the case of FDI a channel of foreign technology, 
the human capital is found to be more effective for 
economic growth. This means that in the case of FDI, 
absorptive capacity of host country matters.  

Cuaresma and Scharler (2008) investigated the 
importance of absorptive capacity of foreign technology in 
effecting the productivity of the host county. A sample of 
21 Organisation for Economic Co-operation and Deve-
lopment (OECD) countries were used from 1973 to 1997. 
There were assumption that there are two major channels 
of foreign technology that is, imports of intermediate and 
capital goods and FDI. Proxies of market regulation and 
wage bargaining were used to measure the absorption 
barriers. Foreign R&D stokes were constructed by their 
import share weighted aver-ages of the country‟s own 
R&D stock. The overall results showed that the foreign 
R&D have positive impact on the economic growth of the 
countries which have lower levels of market regulation, 
employment protection and lower barriers to the entre-
preneurship. Krammer (2008) examined the impact of 
international spillovers via trade and FDI on economic 
growth of 27 transition and 20 western European 
countries over the period from 1990 to 2006 by using 
latest technique of panel unit root and co integration test. 
There   were    two   channels   of  foreign  R&D  stocks (i) 

163          Afr. J. Agric. Mark. 
 
 

 
Foreign R&D stocks embodied in imports (ii) foreign R&D 
stocks embodied in FDI. Domestic R&D capital stocks 
and human capital were used as control variable. 
Domestic R&D capital stock is based on the gross 
expenditure on R&D and for human capital, the proxy of 
average years of secondary schooling in male population 
over 25 year old was used. Human capital measured the 
absorption capacity of host country. The finding of this 
study showed that both trade and FDI remains the main 
carrier of foreign technology both trade and FDI have 
significant impact on TFP but FDI have smaller impact as 
compare to trade in the case of both developed and 
developing countries. The human capital and domestic 
R&D stocks which were used as absorption capacity and 
control variable play a crucial role in TFP of these 
countries. On the basis of these results it can be 
concluded that openness to both trade and FDI is very 
crucial and beneficial for developing economies but to 
use this foreign technology more efficiently there is need 
of skilled educated labor force and domestic R&D stocks 
in order to absorb foreign technology.  

Chandran and Munusamy (2009) investigated the long 
run impact of openness on growth of manufacturing 
sector of Malaysia by using the annual data from 1970 to 
2003. The source of data is Malaysia Economic statistics-
time series, published by the development of statistics, 
Malaysia. The data includes the value added output of 
manufacturing sector, net fixed capital, number of labor 
and Trade openness. To include the impact of Asian 
financial crisis 1997 to 1998, the dummy variable was 
used. To estimate the result the co-integration test was 
performed using the Autoregressive Distributive Lag 
(ARDL) method. To check the long run relationship the 
bond testing approach was used. The results showed that 
there exist long run relationship among the manu-
facturing value added output and all the independent 
variables. But short run results revealed that in the short 
run openness have no effect on the growth of manu-
facturing sector of Malaysia. The conclusion of this study 
showed that any country can only benefit form Economic 
openness if it uses openness as source of growth on long 
term basis. In the case of discontinuity in trade policy or 
opening up of economy for only short time could not 
encourage the Economic growth of any country. Guessan 
and Yue (2010) investigated the long-run impact of trade 
liberalization and foreign direct investment on the 
Economic growth of Cote d`Ivoire by using the time series 
data from 1980 to 2007. The variables which were used 
are output defined by per capita real GDP of Cote 
d`Ivoire, Foreign direct investment which is also in real 
form, openness was measured by the total sum of total 
export and total import as the ratio of GDP, labor 
measured by total labor force and for capital the proxy of 
real value of gross fixed capital formation was used. Data 
of all the variables were taken from world development 
indicator (WDI, 2008). 

Aggregate   production   function   was  used in order to 



Benazir et al.          164 
 
 

 
check the relationship and this function was estimated by 
using bounds testing co integration procedure which is 

ARDL
11

 bounds testing approach to investigate the long-

run as well as short-run impact of all exogenous variables 
on the Economic growth of Cote d`Ivoire. Before 
estimating the model the stationary status was checked 
by using the unit root test and result showed that all the 
variables were stationary at first difference. ARDL results 
showed that there is long-run relationship among the 
explanatory and dependent variables.  

The results of Causality test showed the unidirectional 
causal relationship exists which is from independent 
variables to Economic growth. In this case FDI and trade 
openness have significant and positive impact on 
Economic growth of Cote d`Ivoire.  

This brings the policy recommendation for Cote d`Ivoire 
that the policy makers should formulate Economic policy 
in such a way to attract more foreign direct investment 
along with reducing the trade restrictions in order to 
achieve higher Economic growth. Brain drain means 
emigration of a proportion of the population which is 
comparatively highly educated as relative to average 
population. Haque and Kim (1995) concluded in their 
study that emigration causes brain drain which reduces 
the Economic growth.  

Zhu Yiying (2010) tried to investigate how China has 
become the most attractive place for FDI and how this 
FDI effect the economy of China by bringing the foreign 
Technology into China. The author used the theoretical 
frame work to explain his point of view. As a result of 
reforms and opening up policy of China, a record FDI 
have come to China during the last three decades. FDI 
not only brings Technology to China but also there is 
establishment of R&D centers by MNCs which help to 
localize their products to create competitive environment 
in China`s markets. This market competition brings 
developing momentum in the host economy. Foreign 
companies provide advices and professional assistance 
to the local suppliers which help to accelerate the growth 
of local enterprises and healthy competition. In this way, 
FDI acts as source of positive Technology diffusion to 
host country. Boermans (2010) analyzed that exporting 
firms are more productive than non-Exporting because of 
“learning Exporting” by using firm level data of Africa from  
1991 to 2003 collected by the survey of World Bank 

(RPED)
12

.  
The results showed that African exporting firms are 

more productive and significantly learning by Exporting as 

compared to the non-exporting firms. The exporting firms 
are more active and competitive internationally as 

compared to domestic firms. Therefore, Government 

should formulate such policies which help to make 

domestic firms more active internationally through export 

promotion programs. 
 
 
11 Autoregressive Distributed Lag 

 

12 “Regional Program on Enterprise Development” 
 

 

 
 
 
 
EMPIRICAL ANALYSIS 
 
Model specification and data sources 
 
Many theorists are of the view that technology is key 
determinant of sustainable economic growth. Creation of 
new products which expands the knowledge and new 
ideas is also vital for growth. Alternatively consumers 
prefer more of the new products and may be willing to 
pay more for products which are consistent with latest 
fashion. As the new products come through new ideas, 
new knowledge, so the international trade can acts as 
source to transfer these new ideas or knowledge 
internationally. In Pakistan many studies was done on 
trade openness and economic growth but no one has 
investigated the effect of foreign technology on growth 
which comes from imports of goods. There are many 
factors which are critical about the effectiveness of 
foreign technology for the Economic growth of host 
country. If the traded goods are more R&D intensive then 
this type of trade will have significant positive impact on 

economic growth of importing country
13

. As the goods 

produced by developed country is R&D intensive so 
opening up of trade by developing country like Pakistan 
with developed country like Japan or USA will have 
significant positive impact on economic growth of 
Pakistan. This impact will also depend on the human 
capital of developing country. Although the opening up of 
trade is critical for developing countries but alone trade 
openness is not enough for Economic growth. The 
effectiveness of imported technology also depends on the 
absorptive capability and ability to adopt foreign 
technology, which further depend on the local circum-

stances of host country
14

. Absorption of foreign 

technology is also affected by the distance of host 
country from the global frontier (Keller 2002). Hejaji and 
Safarian (1999) summarized theoretical argument for 
inward FDI and trade as channels for Technology 
diffusion. FDI is channel to bring the foreign capital, 

management expertise and production Technology
15

. 

Howitt (2000) and Mayer Foulkes and Howitt (2000) are 
of the view that flow of ideas, new method of production 
and management skill through the movement of peoples 
across the countries benefit the production growth of 
especially developing economies. The emigration of 
people of Pakistan is used as proxy to capture impact of 
this flow of ideas. Most of the researchers including 
Ahmed and Anoruo (1999-2000), Edward (1998), Edward 
(1992), Harrison (1996), Isean (1998), Santos (2002) and 
Wacziarg (2001) have used total exports and imports as 
independent variable in their growth models. Many 
studies like Coe and Helpman, (1995), Keller (2000). Xu 
and Wang (1999), Mayer (2001), have concluded that 

 
13

 Coe and Helpman (2004) 
 

14
 Evenson and Westphal (1995) 

 

15
 (Johnson, 1972), Blomstrom and Kokko (1997), Aitken and Harrison (1999), 

Borensztein, De Gregorio and Lee (1998) and Blomstrom and Sjoholm (1999) 
 



 
 
 
 
import of capital goods is a major channel of foreign 
technology and source of productivity for developing 
economies. Some economists like Clerides, Lach and 
Tybout (1997) are of the views that exporting to 
industrialized counties is a source of learning or acts as 
learning by exporting. Chuang (2000), Greenaway and 
Sapsford (1994) and Dollar (1992) have found that 
Exports have positive impact on growth. 

There is a lot of empirical work done on the issue to 
examine the impact of liberalization on economic growth 
of Pakistan but no one examined the relative importance 
of several channels of transformation of Technology from 
developed countries to Pakistan as a result of liberali-
zation of economy. So there is need to empirically 
examine importance of Technology transmission for the 
Economic growth of Pakistan. Pakistan is also one of 
those countries which allocate very minor amount on R & 
D and faces scarcity of Technology, so foreign sources of 
technology are very important for Pakistan. Main focus of 
this chapter is to empirically examine the significance of 
transmission of technology as result of liberalizing 
economy for economic growth of Pakistan. On the bases 
of literature and economic theories, the following model 
will be employed. As shown in Table 2. 
 
ln(Y)t = f[ln(K)t, ln(L)t, ln(TEXP)t, (MTEC)t, (FDI)t, 

ln(EMG)t]  
or 
ln(Y)t = β0 + β1 ln(K)t+ β2ln(L)t+ β3 (MTEC)t+ β4 (FDI)t+β5 

ln(TEXP)t+β6ln(EMG)t +μt 
 
MTEC

16
 is technology goods import intensity defined as 

imports of Technology goods divided by total import
17

. 

FDI is the foreign direct investment to GDP ratio is used 
as other channel of Technology diffusion supported by lot 
of literature. Data of both the variables MTEC and FDI is 
taken from Economic Survey of Pakistan. The variables 

ln(TEXP)t and ln(EMG)t are the natural logarithm of total 

export and total number of emigrants annually respec-
tively. Both are important indicators of economic liberali-
zation and source of Technology transmission. Data of 
total exports in million Rupees is taken form Economic 
Survey of Pakistan and total number of Emigrants 
annually taken from Bureau of Emigrants and Overseas. 
Gross Capital formation and employed labor force both 
are important factor of production which is consistent with 
the models of Solow (1956), Swan (1956) and Romer 
(1986 and 1990). Both are used after taking the natural 
logarithm (lnK, lnL). Data of Gross capital formation 
(current US$) and Gross domestic products (GDP US$) 
is taken from world Development Indicator (WDI) and 
employed labor force taken from International Labor 

organization (ILO). And at the last μt is random error 

term. The natural logarithm is taken to convert the 

 
16

For detail see Andreas and Marios (2003) 
17

 Helpman and Grossman (1991), Wilson and Caselli (2003), and Eaton 

and Kortum (2001) 

165          Afr. J. Agric. Mark. 
 
 

 
different variable with different units into percentage. 

MTEC and FDI are already in percentage so these both 

variables are used without taking natural logarithm. 

During the year 1971 to 72 a major change occurred 

caused by the separation of East wing of Pakistan that‟s 

why the data from 1972 to 2009 have been used for 

estimation purposes. 

 
EMPIRICAL FINDINGS AND RESULT DISCUSSION 
 
Augmented Dickey Fuller (ADF) is applied to check the 
stationary status and the results are given in table 3. The 
results of ADF test indicate that every variable either is 
stationary at level or at first difference. MTEC and ln 
(EMG) variables both are stationary at level because on 
the basis of t-statistics the null hypothesis of non-
Stationarity is rejected at level. Remaining all variable are 
stationary at first difference because on the basis of t-
statistics the null hypothesis of non-Stationarity is 
rejected at first difference. It is confirmed that no variable 
has order of integration two or I (2). So it fulfills the 
assumption of bounds test that no variable is having I (2). 
The optimal lag length is one selected by using Schwarz 
Bayesian and Hannan-Quinn information criterion. The 
value of F statistics is 3.66 reported in table 4 below. As 
the calculated F statistics is greater than upper bound at 
10% and 5% level of significant, so the null hypothesis of 
no co-integration is rejected. This Bounds Testing results 
confirm that there is co integration relationship between 
dependent and independent variables of the model. Table 
5 shows that import of technology goods (MTEC), 
exports, employed labor force and gross capital formation 
have positive and statistically significant impact on GDP 
in the long run.  

The coefficient of export reveals that one percent 
increase in total exports leads to 0.17% increase in GDP 
growth in the long-run. The positive association between 
exports and economic growth confirm the export lead 
growth hypothesis for Pakistan. Export is the important 
contributor to the economic growth. There are number of 
benefit of export expansion, like it increases efficiency 
and improves quality of domestic production. The positive 
relation between exports and growth is because of the 
exports sector have positive externalities for non-
exporting sector of the country. Expansion production of 
exportable products can lead to production growth by 
adoption and transmission of modern method of 
production. Most of evidences are in the favor that when 
any country starts exporting, the firms of that country get 
benefit from interacting with customers from all over the 
world. These customer demand higher quality products 
and in this way impose condition to produce higher 
standard products as compared to domestic customer 
demand. The coefficient of MTEC reveals that one 
percent increase in the technology goods import intensity 
(MTEC) leads to 0.008% increase in GDP growth in the 
long run. Imports of technological goods (capital, 



Benazir et al.          166 
 
 
 

Table 2. Data and Variable Description. 
 

Variable Description Source 

Y Gross Domestic products (GDP) WDI
18

 
K Gross Capital Formation WDI 
L Employed Labor Force ILO

19
 

MTEC Technology goods import intensity
20

 Economic Survey of Pakistan 
TEXP Total export Economic Survey of Pakistan 
EMG Number of emigrants Bureau of Emigrants & Overseas 
FDI Foreign Direct Investment to GDP ratio Economic Survey of Pakistan 

 
 
 
Table 3. Results of Augmented Dickey Fuller (ADF) test. 
 
 

variables 
Test statistics at Level Test statistics at 1

st
 difference 

 

 
With intercept With trend and intercept With intercept With trend and intercept  

  
 

 (MTEC) -4.647363
***

 -4.542410 
-4.738798

***
 

 
 

 ln(TEXP) -2.681788 -5.510487 -8.987188 
 

 ln(L) 0.122764 -1.633166 -6.614008
***

 -6.652551 
 

 ln(EMG) -4.064988
***

 -4.142916 
-4.625059

***
 

 
 

 ln(K) -1.446830 -2.903182 -4.525254 
 

 FDI -1.906312 -3.580459 -4.193909
***

 -4.386527 
 

 ln(Y) -1.299343 -0.677579 -5.125618
***

 -5.523892 
  

*** shows significance at 1%, 5% and 10% level of significance 
 
 
 

Table 4. Wald or F- Statistics for Testing Co-Integration. 
 

 

Calculated F- statistics 

At 10% level of significance At 5% level of significance 
 

 Lower bound Upper bound Lower bound Upper bound 
 

  I(0) I(1) I(0) I(1) 
 

 3.66 2.03 3.13 2.32 3.50 
 

 
 
 

Table 5. Estimated Long Run Coefficients using the ARDL Approach.  
ARDL (1, 0, 1, 1, 0, 0, 1) selected based on Schwarz Bayesian Criterion. 

 
Dependent variable is ln(Y) 38 observations used for estimation from 1972 to 2009  

 Rgressor Coefficient Standard Error T- Ratio Probability 
 Constant 7.5033 4.6473 1.6145 [.118] 
 (MTEC) .0079331 .0031764 2.4975* [.019] 
 ln(TEXP) .17237 .038716 4.4523* [.000] 
 ln(L) .64507 .31852 2.0252* [.053] 
 ln(EMG) .0015807 .032163 .049145 [.961] 
 ln(K) .16849 .067285 2.5042* [.019] 
 FDI -.065644 .026417 -2.4850* [.019] 

 
*Denote the significance of variable at 10% and 5% of level of significant. 

 
 
 
18 World Development Indicators 

 

19 International Labor Organization 
 

20 The Technology goods imports shares is used rather than imports as whole 
 



167          Afr. J. Agric. Mark. 
 
 
 

Table 6. Error Correction Representation for the Selected ARDL Model.  
ARDL (1,0,1,1,0,0,1) selected based on Schwarz Bayesian Criterion Dependent 

variable is dln(Y)38 observations used for estimation from 1972 to 2009. 
 

Regressor Coefficient Standard Error T-Ratio[prob] 

C 2.0134 1.6109 1.2499[.221] 
dMTEC .0021287 .8213E-3 2.5918[.015] 
dln(TEXP) .085455 .026154 3.2674[.003] 
dln(L) -.19889 .11654 -1.7066[.098] 
dln(EMG) .4242E-3 .0085583 .049560[.961] 
dln(K) .045213 .023595 1.9162[.065] 
dFDI -.0023993 .0072560 -.33066[.743] 
ecm(-1) -.26834 .072197 -3.7168[.001] 
R- Squared = .62306. Adj R-squared = .48345   
F- stat . F(7 , 30) = 6.3757 , prob(F-stat) = [.000]  
Mean of Dependant Variable = .048924  
S.D of dependant variable = .020883  
DW – statistics = 2.3769 

 

 
machinery and parts of machinery) have positive and 
statistically significant impact on economic growth of 
Pakistan which indicates that to achieve development 
and to boost economic growth, it is crucial for Pakistan to 
import technology goods (capital, machinery and parts of 
machinery) and input material so that the productive 
capacity can be expanded. The result also confirms that 
excessive imports of finished goods (luxury goods) have 
negative relation with economic growth. This is because 
the excessive imports of finished (luxury goods) replace 
the domestic output and thereby the process of value 
addition in the country. The results are in contrast of the 
finding of Akbar and Naqvi (2000) who concluded that the 
imports do not have any role in economic growth of 
Pakistan but the results of this research show that the 
imports of technological goods (capital, machinery and 
parts of machinery) are very crucial for economic growth 
of Pakistan. The results of this research have also 
provided the clear cut answer to the study done by 
Husain (2005), his study could not give the clear cut 
answer to the question of whether the trade liberalization 
positively affects the economic growth or negatively.  

The two important growth factors (labor and capital) are 
the most significant and have positive relation with growth 
which is consistent with the models of Solow (1956), 
Swan (1956), Kaldor (1961) and Romer (1986 and 1990). 
The coefficient of employed labor (lnL) shows that one 
percent increase in employed labor leads to 0.64% 
increase in GDP growth and co efficient of gross capital 
formation (lnK) shows that one percent increase in gross 
capital formation leads to 0.17% increase in GDP growth 
in the long run. The impact of emigration is not significant 
although the sign of coefficient of emigration is positive. 
On the other hand FDI has significant but negative effect 
on GDP. The coefficient of FDI shows that one percent 
increase in FDI leads to 0.06% decrease in GDP growth 
in the long run. The negative relationship between foreign 

 

 
direct investment economic growths indicates the lack of 
high skilled labor force and basic infrastructure to absorb 
the technology which comes through foreign direct 
investment. This lack of capabilities and inefficiencies in 
technological learning prevent spillover impact of MNC‟s 
on economic growth of Pakistan. FDI brings capital 
intensive techniques in developing economies which are 
labor abundant and developing countries required time 
for shifting form labor intensive to capital intensive 
techniques that is why FDI is not effective in most of 
developing countries like Pakistan. The results of error 
correction model in table 5 give information about the 
short-run speed of adjustment to-wards long-run equili-
brium which is 27% per year. This further confirms the 
short-run movement of the model to-wards long-run 
equilibrium. As shown in Table 6. 
 
 
SENSITIVITY ANALYSIS 
 
At the end, the reliability and goodness of fit of the ARDL 
model is necessary condition before recommending and 
forecasting any policy on the basis of results obtained. So 
stability and diagnostic tests are performed. To examine 
the serial correlation the Lagrange Multiplier (LM) test are 
used. Heteroscedasticity are checked using test based on 
the regression of squared residuals on squared fitted 
values and for normality, the test based on skewness and 

Kurtosis of residuals are used. On the basis of לא
2
 

Statistics or F-Statistics as given in Table 7 we fail to 
reject the mull hypothesis of 
 
A. No serial correlation   
B. No Heteroscedasticity  
C. Normality of data.  
 

At   the   end  for   examining  of  stability  of   coefficients 



     

 Table 7. Diagnostic Tests    
     

 Test Χ
2
-statistics F - statistics  

 Lagrange Multiplier test to check Serial Correlation Χ
2
= 2.1756[.140] F= 1.5790[.220]  

 Skewness & Kurtosis of Residuals test for normality Χ
2
 =.42725[.808] -----  

 Test to check the Heteroscedasticity based on Regression of Sq. residuals. Χ
2
 =.76906[.381] F= .74363[.394]  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
Figure1. Plot of cumulative sum of recursive residuals. 

 
 
 
Cumulative Sum of Recursive Residuals (CUSUM) and 

Cumulative Sum of Squares of Recursive Residuals 

(CUSUM square) are used as can be seen from Figure 1 

and 2 that the fitted line is within 5% critical bounds so 

the Null Hypothesis of coefficient cannot be rejected. It 

means that model is stable. 
 
 
CONCLUSION AND POLICY RECOMMENDATIONS 
 
On the basis of all the discussion on economic liberali-
zation and estimated results of the model, it can be 
concluded that openness to both trade and FDI is very 
crucial and beneficial for Pakistan but to use foreign 
technology more efficiently, there is need of skilled 
educated labor force and domestic R&D stocks in order 
to absorb this technology. To promote the economic 
growth of Pakistan, there is need to diversify the export 
base and import duties should be removed from the 
import of technology goods (capital, machinery and parts 
of machinery) and input material and at the same time the 
imports of unnecessary and luxuries should be reduced 
through heavy import taxes. There are new opportunities 
THAT have been opened in Asia and Middle Eastern 
countries for Pakistan, there is need to boost economic 
growth by exporting to these markets and by importing 
the capital goods from these economies at low 
transportation cost. Pakistan leadership must take steps 
to resolve energy crisis and to improve the law and  order 

 
 
 
and order situation in order to achieve the macro-
economic stability which is vital in boosting economic 
growth and restoring foreign investor‟s confidence. 
Structural reforms that can improve investment climate 
and competitiveness are necessary to make both foreign 
direct investment and domestic investment more effective.  

There is need of structural transformation through 
increasing the mobility of capital and labor across sectors 
and changing their production process in order to enable 
our firms and entrepreneurs to become globally compe-
titive by diversifying their products. Government can also 
set up different programs like export investment support 
fund to transfer public investment to the selected sectors 
of exportable goods. Acquiring and up gradation of 
modern technology is necessary for Pakistan in order to 
move away from low value and traditional export products. 
This can only be achieved by providing incentives to 
facilitate technology adoption, acquisition and replace-
ment. Government should formulate and implement such 
policies which can enhance the adaptive and absorptive 
capacities of economy for maximization of technology 
dissemination. Creation of skilled labor force not only for 
MNCs, but also for local firms is crucial in order to 
promote competitive domestic enterprises. Education 
policies should be changed as the demand for labor force 
change from industry. Along with the policies to enhance 
the absorptive and adoptive capacities of the economy, 
Government needs to target specific technologies related 
to the development areas. By providing  fiscal  or  finance 

Benazir et al.          168 



169          Afr. J. Agric. Mark. 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
Figure 2. Plot of cumulative sum of recursive residuals. 

 
 
 
incentives, Governmentcan attract these specific techno-
logies into Pakistan. Establishment of Universities, 
Science and technology parks and other research institu-
tions can generate environment for R & D innovation and 
THIS can help to attract high technology investors 
relevant to priority areas of development strategies. The 
impact of foreign research and development capital stock 
and domestic R&D capital stock on economic growth of 
Pakistan should be incorporated in the suggested model. 
Due to the unavailability of data, these variables have 
been left in this model. But future study should take into 
account these variables; because these are significant 
factors for the evaluation of impact of foreign technology 
and knowledge on economic growth of Pakistan. 
 
 
Conflict of Interests 
 
The authors have not declared any conflict of interests. 
 
 
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