African Journal of
Business Management

  • Abbreviation: Afr. J. Bus. Manage.
  • Language: English
  • ISSN: 1993-8233
  • DOI: 10.5897/AJBM
  • Start Year: 2007
  • Published Articles: 4062

Full Length Research Paper

Empirical analysis of foreign direct investment and economic growth in Pakistan using VECM model

Iqra Ashraf
  • Iqra Ashraf
  • School of Economics and Management, University of Chinese Academy of Sciences, Beijing, China.
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Shi Yong
  • Shi Yong
  • School of Economics and Management, University of Chinese Academy of Sciences, Beijing, China.
  • Google Scholar
Raja Muhammad Afzal
  • Raja Muhammad Afzal
  • State Key Joint Laboratory of Environment Simulation and Pollution Control, School of Environment, Tsinghua University, Beijing 100084, China.
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Guo Kun
  • Guo Kun
  • School of Economics and Management, University of Chinese Academy of Sciences, Beijing, China.
  • Google Scholar


  •  Received: 22 July 2019
  •  Accepted: 16 September 2019
  •  Published: 31 October 2019

Abstract

Theoretically Foreign Direct Investment (FDI) is considered as a growth accelerating component that has attained significant heed in the development of the country in the past decade. Pakistan has been selected due to its geostrategic location, which is a major attraction for developed economies to invest in for lucrative returns. This study objective is to trace the long as well short run analysis among FDI, Gross Domestic Product (GDP), Gross National Income (GNI) and Imports (IMP) of Pakistan from year 1987 to 2017 by using the ADF Unit Root Test, Johansan co-integration approach, VECM and Granger causality methods. The results reveal that the two-way causality between FDI and growth in Pakistan is not highly significant. Pakistan's economic growth indeed attracts FDI influx, which supports the market-size hypothesis; while the FDI influx stimulates the economic growth of Pakistan to some degree, the result is not significant. In light of the results achieved, this study suggests future recommendations to policy makers for an effective strategic plan to welcome foreign investments in Pakistan.

 

Key words: Foreign direct investment (FDI), economic growth, vector error correction model (VECM), unit root test, co-integration analysis.