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.
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