Review of Economics and Development Studies Vol. 5, No 3, 2019 513 Volume and Issues Obtainable at Center for Sustainability Research and Consultancy Review of Economics and Development Studies ISSN:2519-9692 ISSN (E): 2519-9706 Volume 5: No. 3, 2019 Journal homepage: www.publishing.globalcsrc.org/reads How Does Foreign Direct Investment Affect Economic Growth in Pakistan: A Time Series Data Analysis 1 Hina Ali, 2 Fatima Farooq, 3 Khizra Sardar, 4 Zahra Masood Bhutta 1 Assistant Professor, Department of Economics, The Women University Multan, hinaali@wum.edu.pk 2 Assistant Professor, School of Economics, Bahauddin Zakariya University Multan, Pakistan 3 M.phil Scholar 1Assistant Professor, Department of Economics, The Women University Multan. 4 Assistant Professor, National University of Modern Languages Multan. Pakistan ARTICLE DETAILS ABSTRACT History Revised format: 30 June 2019 Available Online: 31 July 2019 In developing countries, the foreign sector plays an important role and a critically important one for economic stabilization. The yearly data was employed for the period 1975- 2017 for the analysis. The variables of the study include the gross domestic product, foreign direct investment, inflation rate, industry sector growth, broad money, gross fixed capital formation, trade openness, and gross savings. An empirical analysis is done by using Auto-Regressive Distributed Lag Model (ARDL), and the Augmented Dickey Fuller (ADF) test is applied to analyze the unit root. In the present study, empirical findings demonstrated the negative association between economic growth and foreign direct investment in Pakistan. This argument also supports the idea, where foreign direct investment will not be in favor of the growth of developing countries as the domestic industry would not compete to the foreign industry which provides the products at a low rate. Secondly, foreign direct investment in Pakistan is not that level which can affect the GDP of Pakistan. © 2019 The authors, under a Creative Commons Attribution-Non Commercial 4.0 Keywords Gross Domestic Product,Foreign Direct Investment,Inflation Rate,Gross Fixed Capital Formation JEL Classification: E24, F38, E31, G32 Corresponding author’s email address: hinaali@wum.edu.pk Recommended citation: Ali, H., Farooq, F., Sardar, K. and Bhutta, Z. M.(2019). How Does Foreign Direct Investment Affect Economic Growth in Pakistan: A Time Series Data Analysis. Review of Economics and Development Studies, 5 (3), 513-520 DOI: 10.26710/reads.v5i3.711 1. Introduction Foreign investment is a source of revenue for the developing countries and it is also a source of technological innovation that came with foreign investment. These, financial and technological resources are indispensible for economic growth (Salacuse and Sullivan, 2005). Foreign direct investment demonstrates the direct investment from the foreign investors attaining a permanent interest in a project in another country (Calvoand Sanchez-Robles, 2001). Technology transfer from foreign investors to the domestic nation increases productivity in developed countries which merely not have been observed in the developing countries as a consequence of a scarcity of adequate human capital. There are three types of foreign direct investment, for example, horizontal, vertical and the platform. In first, foreign direct investment is defined by the investment that determines industrialized services, and the second http://www.publishing.globalcsrc.org/reads Review of Economics and Development Studies Vol. 5, No 3, 2019 514 one arises when direct Investment shifts upward or downward with the various unit changes and the last one deals with the purpose of trading to another country (Khan, 2007). Attaullah and Le (2006) reported that developing countries have a big saving-investment gap. To fill the gap, is indispensable to enhance economic growth. May of the existing theories in literature elaborate on the role of foreign direct investment in the economic growth of a country as elaborated by the (Adams, 2009)? Technology transfer to developing economies through foreign direct investment stimulates economic growth by providing the health facilities, socio-economic development, and availability of educational facilities (Calvo and Sanchez-Robles, 2002). Most of the opponents of the theories demonstrated the negative effects of FDI on economic development as it creates competition among the domestic non-developed and the developed foreign firms (Dunning and Pitelis, 2008). FDI is favorable that it first one is that foreign direct investment will minimize production cost and expand economies of scale (Shatz, 2003). As far as the motivation for the foreign direct investment is concerned, the diversification of the motivators can be observed as specific economic freedom in a positive way; hence economic freedom is a substantial source and the main factor of foreign investment. Consequent upon the FDI inflows, two major changes in an economy happen one is the capital accumulation and the enhancement of factor productivity (Haryana, 2009). Dunning (2001) has elaborated the benefits of foreign direct investment as well that further leads to economic growth. 2. Literature Review Azam and Ling Lukman (2005) stated various determinants of FDI i.e. market size, urbanization, economic reforms, inflation, exports, tariff, and the volume of trade. Cobham (2001) elaborates on the domestic investment and concluded that the expansion of the size of the industry leads to the provision of the opportunities for employment in the host country. Buckley and Wang (2002) examined the contribution of foreign direct investment to growth. The research found that the foreign direct investment inflows are a consequent of the social and economic conditions of the country and concisely the environmental conditions of the recipient country. Lipsey (2000) showed a positive relationship between foreign direct investment and GDP growth. Foreign direct financing might have a positive association with economic growth while being the major contributor to technological innovation and skill enhancement in the country (Campos and Kinoshita, 2002). Asiedu (2002) studied the high return on investment and improved fiscal policies are important factors to attract foreign investors. Choe (2003) supported the same findings as the growth is positively related to foreign investment. Atique et al, (2004) by using 1970-2001, examined as domestic capital enhance economic growth in Pakistan. Gross domestic product may be enhanced by the foreign investment to help in poverty reduction that enhances the income levels (Nunnekamp, 2004). Blonigen (2004) discussed that quality and quantity of foreign direct investment for both industrial and underdeveloped nations. Javorcik (2004) concluded the significant positive association is established between foreign direct investment and productive capability. Trade openness significantly influences foreign direct investment (Agosin and Machado, 2007). Iwanow and Kirkpatrick (2007) elaborated the positive association of foreign direct investment and economic growth. Khan (2007), examined the relationship between growth rate and foreign direct investment. Azamand Luckman (2010) showed the effect of various economic factors on foreign direct investment for the economy of Indonesia, Pakistan, and India by using panel data for 1971–2005. Log-linear regression and panel ordinary least square are employed. Findings of several variables associated with Pakistan and India were similar except two variables (trade openness and government consumption) while Indonesia results differ from Pakistan and India results. (Kokand et al., 2009) showed a positive relationship among infrastructural improvement with foreign direct investment. Khadaroo and Seetanah (2010) proved the accumulated gains by infrastructure enhancement are associated with higher availability of transportation facilities and a reduction in transaction cost. Nair‐Reichert and Weinhold (2001) used random and fixed effect model and permits heterogeneous in panel data. The cause and effect relationship among foreign direct investment and development is positive. Falki (2009) illustrated an inverse behavior in foreign direct investment and economic growth. (Ejaz and Atif, 2010) critics of foreign direct investment claimed that foreign direct investment in developing countries may control resources, Review of Economics and Development Studies Vol. 5, No 3, 2019 515 supplant domestic investment, use inappropriate technology. Malik (2015) showed a negative association among foreign direct investment and growth using panel of SAARC countries and concluded that economical execution is negativity associated with foreign direct investment. 3. Data and Methodology In this section, the researcher will form the empirical and theoretical models to examine the relationship between foreign direct investment and economic growth of Pakistan. Foreign direct investment the core regressor while gross domestic product is the dependent variable, while the other variables include Inflat1eaw2ion, industry sector growth, broad money, gross fixed capital formation trade openness and gross savings. 3.1 Data Sources Data for the eight variables gross domestic production, foreigners direct investments, inflation, industry sector growth, broad money, gross fixed capital formation, gross savings and trade openness collected for the analysis. Required data is collected from WDI with annual frequency for a period of 1975-2017. 3.2 Empirical Methodology Following contemplation have been formulated to econometrically analyze the variables of the study. equation (1) Where, Equation (1) above model the relationship between variables of the study has been elaborated. Presented. Foreign direct investment is an essential factor in economic growth (Kowalski, 2000). And foreign direct investment has a significant relation with economic growth in the long run (Kogid et al., 2010). 4. Results and Discussion This section deals with the complete details of the estimation that have been done on empirical grounds. All the parameter estimations and the descriptive details are as follows. 4.1 Descriptive Analysis of the Data Analysis is usually used to delineate the essential characteristics of the time series. In a study, the researcher has given the detailed information of the each descriptive statistic cut-down slews of data into a simple summary. Table 1: Descriptive Estimation GDP FDI INF IND.SEC M2 GFCF TR GS Mean 5.0288 0.8303 9.4968 5.7240 45.6002 16.1748 11.1807 22.4723 Median 4.8463 0.6129 8.5850 4.92108 44.8202 16.8371 9.9681 22.1660 Maximum 10.2157 3.6683 24.8911 16.2629 58.8676 19.2354 17.6116 30.4314 Minimum 1.0143 0.0616 1.8107 -5.2068 33.6679 12.5206 4.6887 14.291 Std. Dev 2.1504 0.8071 5.4479 3.6426 6.1961 1.6979 3.8931 3.3942 Skewness 0.2059 2.1470 1.2039 0.0172 0.4317 -0.4956 0.3168 -0.1496 Review of Economics and Development Studies Vol. 5, No 3, 2019 516 Kurtosis 2.4241 7.3347 4.1615 4.6125 2.3065 2.2196 1.7194 3.1304 Probability 0.6382 0.0000 0.0016 0.0972 0.3332 0.2402 0.1606 0.9089 Source: Authors’ calculations Table 1 represents the mean, median and the standard deviation for the variables of the research. All the information is presented in the table. Row 1 describes the variables of the research. While the mean, median, maximum, minimum, st.dev, Skewness, kurtosis and probability are presented in the table in the rows. 4.2 Stationary of the Data Dickey and Fuller (1981) introduced the “Augmented Dickey Fuller” test to test for the unit root and it is defined by a constant variance and the average of series overtime. The details of the unit root process are described in the table below. Table 2: Augmented Dickey Fuller Test At Level At 1st Differenc Conclusions Variables Intercept Intercept and Trend intercept intercept and Trend GDP -3.9247* -4.0671* -10.1003* -10.0261* I (0) FDI -2.8284 -3.0963 -4.5205* -4.4850* I (1) INF -5.8676* -5.7857* -7.9903 -7.8868* I (0) IND.SEC -4.7580* -4.7580* -7.6450* -7.5515* I (0) M2 -1.5028 -3.6357 -5.4734* -5.4094* I (1) GFCF -1.9228 -3.5560 -6.1994* -6.0690 * I (1) TR -1.5833 -1.8753 -7.0522* -7.3355* I (1) GS -3.5854 -3.6244 -6.7917* -6.7841* I (1) Note: “*” shows 1 % level of significance for the variable. Source: Authors’ calculations based on software, E-Views Table 2 checked the stationary of the time series or not. Estimates of the unit root for gross domestic product, foreign direct investment, inflation rate, industry sector growth, broad money, gross fixed capital formation, trade openness, and gross savings are presented here. Among the above mentioned variables the foreign direct investment, broad money, gross fixed capital formation and , gross savings has unit root but the other variables of the study that were the gross domestic product, inflation and industry sector are stationary at level. So, a mixed order of integration is found in the variables of the study. 4.3 Cointegration Analysis (The Bound Test) As the variables are having among the series, so there is need to check the continuation of the relationship among the mentioned series. By using some of the co-integration tests, as Bound Test, it is tested the existence of the long run association. ARDL bound Test" is developed on the hypothesis that the variables are with zero order of integration and the order of integration one i.e. I (0) and I (1) (Pesaran et al., 2001). Table 3: Co-Integration Results Table 3 illustrates the F-statistic is 6.612 that is greater than upper bound value 4.26 in the model. The results are in favor of the existence of a long run relationship. 4.4 Auto-Regressive Distributed Lag Model Auto-Regressive Distributed Lag Model results are elaborated of the model here (Jagadeesh, 2015). ARDL has the advantage of estimation when the series is non-stationarity and there is cointegration among the variables. So the researcher has developed an important strait for checking the long run associations among the economic variables. Review of Economics and Development Studies Vol. 5, No 3, 2019 517 Table 4: Short-Run Estimates of ARDL Variable Coefficient Std. Error T-Statistic Prob. D(GDP(-1)) 0.3260 0.1582 2.0600 0.0499 D(FDI) -0.8132 0.6831 -1.1903 0.2451 D (FDI (-1)) 1.9154 0.6941 2.7593 0.0107 D(GS) 0.2039 0.1038 1.9648 0.0606 D(GFCF) 0.5074 0.2856 1.7764 0.0878 D(IND.SEC) 0.3308 0.0858 3.8560 0.0007 D(IND.SEC(-1)) -0.2791 0.0932 -2.9952 0.0061 D(M2) 0.0708 0.1018 0.6955 0.4931 D(M2(-1)) -0.1907 0.1078 -1.7682 0.0892 D(TR) -0.1122 0.0707 -1.5864 0.1252 D(INF) 0.0065 0.0574 0.1140 0.9101 CointEq(-1) -1.7578 0.2596 -6.7691 0.0000 Cointeq = GDP - (-1.3221*FDI + 0.1160*GS + 0.2887*GFCF + 0.4520 *IND.SEC + 0.1598*M2 -0.0638*TR + 0.0037*INF.DEF -8.9846 ) Source: Authors’ Estimations Table 4 elaborated that has an insignificant effect on growth while the lagged value it shows significant (positively) association with a gross domestic product in Pakistan in the short run. Gross savings have a positive association with economic growth. Changes in gross saving influence the investment level that helps to influence the productivity potential of the economy sequentially and plays a role in changing the economic behaviors of a country. Due to expansion and in a gross fixed capital formation the other indicators like infrastructure facilities goes improved leads to enhance the employment opportunities connected with such sectors. There is a strong association between gross fixed capital formation and economic growth. As a consequence, with the development of the industrial sector, it would lead to an increase in economic productivity, raise employment, higher income level, and increase in savings and enhancement of productive capability. All other sectors also demonstrate the upward and increasing trends in case of Pakistan. Broad money demonstrates liquid possessions in a financial system. As there is an increase in money supply it positively affects economic growth. Inflation rate showed a statistically insignificant correlation with the growth in the economy of Pakistan. At last the Error correction term elaborates on a long run convergence among the variables. The value for this term is -1.400333 that demonstrates not only that there’s a long-run relationship among the dependent and independent variables but also demonstrates a long run stable equilibrium. Table 5: Long-Run Estimates of ARDL Variable Coefficient Std. Error T-Statistic Prob. FDI -1.3221 0.3318 -3.9837 0.0005 GS 0.1160 0.0632 1.8350 0.0784 GFCF 0.2887 0.1571 1.8366 0.0782 IND.SEC 0.4520 0.0781 5.7825 0.0000 M2 0.1597 0.0577 2.7677 0.0105 TR -0.0638 0.0401 -1.5902 0.1244 INF 0.0037 0.0327 0.1137 0.9104 C -8.9845 5.4077 -1.6614 0.1091 Source: Authors’ Estimations Table 5 illustrate the long-run estimates of the analysis, articulate a negative relation of foreign with growth. Consequently a one-unit change in foreign direct investment inflows GDP growth rate declined by “- 1.322100" units. The reason behind this is that when foreigners invest in recipient country market, by using monopolizing power they discourage domestic investment. So, the main problem for a society occurred in the form of declining gross domestic product growth (Jagadeesh, 2015). Review of Economics and Development Studies Vol. 5, No 3, 2019 518 This negative correlation in the case of Pakistan is attributed to the notion that most of the foreign programs and investment bring no benefit to Pakistan economy moreover; it increases the costs of production in the economy. Appropriate examples for this notion are “China Pakistan Economic Corridor” the benefits attached with these long-term projects will be achieved after a long period and require hard struggle. Gross savings shows a positive relation with economic growth. Due to 1 unit change in gross savings, Gross Domestic Product increases by 0.116049 units. As Pakistan’s economy saves more which in turn also encourages investment level of Pakistan either foreign or domestic. The results of this study are also consistent with Ellahi et al. (2011) and Jagadeesh (2008) and exhibit the positive correlation of Gross Saving with economic growth. The one unit change in gross fixed capital formation there's “0.288705” units change gross domestic product. The objective of this strong relationship was that as infrastructure conditions changes in a country this will increase its growth rate and show a positive trend of economic growth in the long-run relationship. Empirically it is revealed that there is a positive association between gross fixed capital formation and economic growth. One unit change in industrial growth with the gross domestic product will change by 0.452046 changes. 4.5 Stability Analysis The stability analysis illustrates that the estimated relationship is stable in the long run or not. And the results are presented in the figures below. Figure 1: CUSUM Diagram Figure 2: CUSUM-Square Diagram Figure 1 and 2 as by CUSUM illustrate that the model is statistically significant and stable. The assessment of CUSUM-Square also elaborate illustration examiner envisages that model is statistically significant and stable. Intensity or criteria for the significance decided for this CUSUM-Square plot is 5%. 5. Conclusion and Policy Implications There exists contradictory arguments in literature as some researcher concluded a positive association stuck among FDI and economic development while additional ones argued that the dependence hypothesis cleave under- developing nations. Our finding also concluded the negative correlation of with . 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