Foreign Direct Investment Inflow In Pakistan

CHAPTER 1

Foreign direct investment refers to the amount of participation that inflows from country a to country b like in many developing countries it comes from developed countries or it can also come in developed country as net property income from abroad. Foreign direct investment can be positive or negative which then results to the inflow of direct investment. It does not include investments which are done on purchase of shares. Investments can be come from wealthy individuals, public or private companies, government bodies, group related enterprises etc (Herring and Richard Willett, 1999).

Foreign investment proved as very important for the developing countries. In poor nations it is proves as significant driver of development. FDI provides many of the developing countries with great benefits which helped them in achieving their economic growth. Through foreign direct investment there will be many things which are coming to the developing nations. There will be inflow of foreign capital and funds which you can term as hot money coming to your country. This capital can be invested into your business sectors to make it more worthy and profitable. Secondly there will be transfer of skills and technical expertise as if their entrepreneurs will come into your country and combine all the factors of production so then after results will be greater and larger than before (Larkins and Dan, 1998).

Foreign direct investment can affect the country’s economy in different ways. It can affect the GDP rate, exchange rates and government policies in different ways; the effects of foreign direct investment at GDP are very significant. In many countries it constitutes at higher percentages of GDP rates. When foreign investment comes to the country it means that the business activity flourishes in the economy. There will be more production taken place and more goods and services produced by whether incorporated or unincorporated companies, or individual firm or it can be group related to enterprises but in any case there will be more provision of goods as heavy investments are taking places in form of foreign direct investment. GDP is actually refers to the production of more goods in compare to the last year results so a country's GDP will surely increases by foreign direct investment. Total output of the economy will be increased which increases the GDP level (Hoshi, Takeo, Anil, and David, 1991).

1.2 Problem Statement

To identify the relationship between interbank exchange rate, real GDP and Dummy variable with foreign direct investment inflow in Pakistan.

1.3 Research Hypothesis:

H1: Inter Bank Exchange Rate has a positive impact on Foreign Direct Investment Inflow in Pakistan.

H2: Real GDP has a positive impact on Foreign Direct Investment Inflow in Pakistan.

H3: Democratic Government has a positive impact on Foreign Direct Investment Inflow in Pakistan.

1.4 Outline of the study

Foreign direct investment helps here those countries in carrying out their plans like Pakistan got assistance in running its steel mill operation etc. in this way foreign direct investment helps a lot third world countries. Foreign direct investment is basically the inflow of capital or investment from outside countries whether in shape of any kind of assistance or full operations like multinationals etc. foreign direct investment produce positive productivity effect on host countries. The main importance of this direct investment is that the adoption of the foreign technology, and gets to knew about many things through licensing agreements, imitation, employee trainings, process innovation, and link between foreign and domestic firms.

There will be more job opportunities as in developing countries like Pakistan unemployment is a basic problem too which will be solved by the inflow of foreign direct investment. There will be not be only the employment of people but all factors will be employed if foreign investment will come. Many countries like China, Singapore, South Korea and Malaysia are depending on this foreign direct investment and are moving towards the development quickly. Factor employments will create income generation and through the multiplier effects the round of spending will make the economy proper and developed. There are many nations who are poor and they cannot carry out some of the plans needed in their country like extracting of some natural resources which is very expensive and needs heavy machinery. Foreign direct investment helps here those countries in carrying out their plans like Pakistan got assistance in running its steel mill operation etc. in this way foreign direct investment helps a lot third world countries.

1.5 Definitions

Foreign direct investment refers to the amount of participation that inflows from country a to country b like in many developing countries it comes from developed countries or it can also come in developed country as net property income from abroad. Foreign direct investment can be positive or negative which then results to the inflow of direct investment. It does not include investments which are done on purchase of shares. Investments can be come from wealthy individuals, public or private companies, government bodies, group related enterprises etc (Herring and Richard Willett, 1999).

CHAPTER 2

LITERATURE REVIEW

Foreign direct investment refers to the amount of participation that inflows from country a to country b like in many developing countries it comes from developed countries or it can also come in developed country as net property income from abroad. Foreign direct investment can be positive or negative which then results to the inflow of direct investment. It does not include investments which are done on purchase of shares. Investments can be come from wealthy individuals, public or private companies, government bodies, group related enterprises etc (Herring and Richard Willett, 1999).

Foreign investment also comprises of multinationals which open there operating branches in your countries and perform their business operations like production of goods and services so in USA inflow from multinationals also helps in creating trading activities like surpluses can be exports to outside countries to earn good amounts of foreign exchange which will appreciate your currency. Foreign direct investment resulted in 30% of the jobs in the manufacturing sectors. Inward FDI also led to the capital flow in USA which means higher productivity and living standards (Jaffee, Dwight, and Thomas, 1996).

India is the second largest destination of FDI after China. It is been stated by the surveys of UNCTAD that India has been facing massive growth through Transaction Corporation. The areas which has been strengthen through the inflow of foreign direct investments are, telecommunication, information technology and other major areas like chemicals, apparels, auto components, jewelry and pharmaceuticals. There are high investments from Mauritius mainly due to the routing international funds through the country giving significant capital gain tax advantages; as tax will be treated between India and Mauritius so double taxation will be avoided. On the other hand Mauritius is capital gain tax heaven so there will be zero tax in FDI channel (Hoshi, Takeo, Anil, and David, 1991).

FDI inflows into India reached a record $19.5 billion in fiscal year 2006-07 (April–March), according to the government's Secretariat for Industrial Assistance. This was double of US $7.8bn in the previous year. In 2008 FDI was more than $35bn. Government of India has created many incentives for the investors. The areas which need more relaxations were civil aviation, construction development, industrial parks, petroleum and natural gas, commodity exchanges, credit-information services and mining. Due to the foreign direct investment the economy of India is getting prosperous, economic growth is coming into effect. The potential to be an economic superpower is going to depend on how the government can create incentives for FDI flow across a large number of sectors in India. FDI is also hitting the country of Morocco with its affects. It is ranked among 4rth in foreign direct investment ranking, according to the United Nations Conference on Trade and Development. Other 72 projects were also been approved in 2008 as statistics have shown. FDI increases the job opportunities to 40,023 which were direct and stable. Morocco is making many steps in making it clear destination for foreign direct investment which is really good for its economy and its people overall. Though there was a decline in foreign investment of 29% in 2008 due to the economic downturn but after then it will raised up to the level where it gets god image. The major investors of Morocco are European Union with France (1.86bln), Spain (783mln). Arab countries also invest in Morocco. In terms of sectors, tourism has the biggest share of investment with $1.55bln, which is 33% of the total FDI, followed by the real estate sector and the industrial sector, with respectively $930mln and $374mln (Harris and Ravenscraft, 2008).

The best thing which is hit by foreign direct investment is the opportunity for the citizen of host country that is of employment and skills development. Through investment by companies of abroad business activity taken place in the country, more goods will be demanded so there will be more need of factors of production so that the demand will be meeting up. For this purpose more people will be employed by those companies and in return people enjoy good wages and higher living standards. Secondly to make the product internationally acceptable and of great quality many training programs are also been conducted which enhance the skills of the employees and their efficiency level (Dewenter, 2008).

Resource flows to developing countries over the 1990s and has become a significant. Part of capital formation in the developing countries despite their share in global distribution of FDI continuing to remain small or even declining. The role of the foreign direct investment (FDI) has been widely recognized as a Growth-enhancing factor in the developing countries. The potential advantages of the FDI on the host economy are it promote the use and Exploitation of local raw materials, it enhances modern techniques of management and marketing, it eases the access to new technologies, hot capital inflow could be used for financing current account deficits, finance flows in form of FDI do not generate repayment of principal and interests (as opposed to external debt), it increases the stock of human capital via on the job training. FDI allows you to access the use of raw materials of the host country which means that it will promote its usage, a country can get absolute and comparative advantages on the basis of it natural resources or any kind of material which can give it an edge. Secondly due to the foreign direct investment it is very sure that new technologies will be transfer to the host country and will make them more efficient and up to the international standards. Often multinationals carried out the training programs for the workers of host countries so in this case their expertise will be enhanced and their productivity will increase. If a country is facing current account deficit which means that its balance of payment position is worse and imports are higher than exports so here foreign direct investment plays an important role in financing your current account deficit (Harris and Ravenscraft, 2008).

Hot inflow of money will offset your current account deficit with the flow of capital comes from outside countries in shape of inflow of foreign direct investment. That is how it affects your current account. The advantage of foreign direct investment is that it does not generate any interest payments or the return of principal amounts as opposed to the external debt. So in total foreign direct investment effect your GDP level, current account balance and your democratic government in different ways and mainly positive. Some negative effects of foreign direct investment are also here but that is depends on host government rules and regulations that how they strictly maintain the foreign direct investment into their favors (Froot and Stein, 1991).

Foreign direct investment is basically the inflow of capital or investment from outside countries whether in shape of any kind of assistance or full operations like multinationals etc. foreign direct investment produce positive productivity effect on host countries. The main importance of this direct investment is that the adoption of the foreign technology, and gets to knew about many things through licensing agreements, imitation, employee trainings, process innovation, and link between foreign and domestic firms. Foreign direct investment directly linked with the economic development of the host country and it also give benefit to the base country as they can access raw materials, can avoid trade barriers, will be near to the markets, can take advantage of cheap labors and lack of rules in host countries. Due to benefits host countries and industrializes encourage foreign direct investment (Campa and Goldberg, 1995).

It affects the economic growth by stimulating domestic investment, increasing human capital formation and by facilitating the technology transfer in the host countries. Foreign Direct Investment (FDI) has emerged as the most important source of external. Apart from exchange rates and GDP level inflow of foreign direct investment also effects your democratic government; like how they reshape their policies and incentives. Like if you investors are investing in your country they also will need some of the free hands incentives which will more attract them to invest. For this purpose the government of host country will be reshaping their policies somehow like low corporate and income tax rates, tax holidays will be given to them, special economic zones will be created, export processing zone will be come into existence, financial subsidies, infrastructure subsidies, R&D supports and many other things to relax them so that they will invest more (Rodriguez, 1998).

Besides all these foreign direct investment will be having great impact on GDP level. Local output will increase as more production of gods will be taken place. More production means that your country is having more number of commodities ever than before so real output is increasing means GDP level. Increase in GDP will surely have good effects on your economy. Economic growth will come into effect. More employment will be there and factor payments will lead to the multiplier effects which means more and more income generation and economy will reaches to its equilibrium level (Dewenter, 2008).

Resource flows to developing countries over the 1990s and has become a significant Part of capital formation in the developing countries despite their share in global distribution of FDI continuing to remain small or even declining. The role of the foreign direct investment (FDI) has been widely recognized as a Growth-enhancing factor in the developing countries. The potential advantages of the FDI on the host economy are it promote the use and Exploitation of local raw materials, it enhances modern techniques of management and marketing, it eases the access to new technologies, hot capital inflow could be used for financing current account deficits, finance flows in form of FDI do not generate repayment of principal and interests (as opposed to external debt), it increases the stock of human capital via on the job training (Huang and Walkling, 1997).

FDI allows you to access the use of raw materials of the host country which means that it will promote its usage, a country can get absolute and comparative advantages on the basis of it natural resources or any kind of material which can give it an edge. Secondly due to the foreign direct investment it is very sure that new technologies will be transfer to the host country and will make them more efficient and up to the international standards. Often multinationals carried out the training programs for the workers of host countries so in this case their expertise will be enhanced and their productivity will increase (Itagaki, 2000).

If a country is facing current account deficit which means that its balance of payment position is worse and imports are higher than exports so here foreign direct investment plays an important role in financing your current account deficit. Hot inflow of money will offset your current account deficit with the flow of capital comes from outside countries in shape of inflow of foreign direct investment. That is how it affects your current account. The advantage of foreign direct investment is that it does nohat generate any interest payments or the return of principal amounts as opposed to the external debt. So in total foreign direct investment effect your GDP level, current account balance and your democratic government in different ways and mainly positive. Some negative effects of foreign direct investment are also here but that is depends on host government rules and regulations that how they strictly maintain the foreign direct investment into their favors (Craine, 1999).

Economic growth may mean that we are using are scarce resources swiftly so that they can depleted. Oil, coal, metals other natural resources are in limited supply and can be run out if we use them so quickly. If they do run out then there can be no more capital goods, food supplies may diminish and the population of world may suffer but this can be control through conservation process. Conservation means that you saved up some amount of scarce resources for our future generation rather than consuming it all at once for present people so by it we can save for the upcoming people of the country (Klein and Rosengren, 1994).

Foreign direct investment if comes in the country so that will be definitely mean that more and more factories will be opening in the host country or if it comes for the existing factories like extracting of some natural resources etc so that means expansion of those factories. More and more factories and business sites means that there is though more land is available to produce more goods and services but less for other activities like recreational activities or parks etc. these can also destroy the plants and animals. The solution to this problem is that government should restrict the areas where these factories can be located and only allow there to operate. Those areas should be keeping away from residential locations so that normal citizens should not get affected. Factories should be more on barren land and regions so that fertile lands and animals would not get affected too. Growth also comes with many benefits so government cannot stop it. The best thing in this situation government tries to do is to achieve sustainable growth. Sustainable growth means that along with the foreign investment, which is coming into the country government should try to minimize the harmful effects and should maximize the benefits so that resources and further things can be secured for the upcoming generations too (Hartman, 1992).

There are also some of the negative aspects of foreign direct investment. There are some issues which are related like operation, distribution of the profits made on the investment and the personnel.economic backward section is always get effected of the host country when foreign direct investment is negatively affected. It is the responsibility of the host country to limit the effect of the foreign direct investment. They should make sure that countries which are making foreign direct investments should abide all the laws relating to environmental, governance and social regulations that are laid down country. However there can be some negative effects of economic growth too, means higher and higher GDP can affect your economy and people in it in a different manner too. There can be an opportunity cost of growth; economic growth may achieved by producing more capital goods but at the expense of less consumer goods like television, fashionable clothes etc but this can be in short run as in long run people will be enjoying more and more consumer goods and higher living standards due to the sustainable growth which has been achieved (Baldwin and Krugman, 1999).

CHAPTER 3

RESEARCH METHOD

This chapter explains the methodology used for this research study. This study focused on finding the factors affecting inflows of foreign direct investment in Pakistan. A method is a tool that can help solve problem and research new knowledge. This chapter also gives the methods to evaluate validity and reliability of the research for the factors associated with direct investment in Pakistan.

3.1. Data used:

This research was carried out through Secondary Data.

3.2. Method of data collection:

Data of Foreign Direct Investment and Real GDP is collected through State Bank of Pakistan, website and from Economic Survey of Pakistan and Data for Interbank exchange rate was collected through different websites like www.Oanda.com and www.indexmundi.com.

3.3. Sample size:

Sample data of last 39 years is to be taken. Data has been taken from the year

3.4. Statistical tool used:

In order to measure the relationship between the To Identify the relationship between Interbank Exchange Rate, Real GDP, and Dummy variable with Foreign Direct Investment Inflow in Pakistan. Regression is used as a statistical tool in this research. SPSS software is used to evaluate the relationship between the variables.

CHAPTER 4

RESULTS

4.1. H1: Inter Bank Exchange Rate has a positive impact on Foreign Direct Investment Inflow in Pakistan.

Table 4.1.1

The adjusted R Square value of the above table is 0.944 or 94.4% it means that the one unit change in the independent variable set will bring out the 94.4% change in the variation of dependent variable. Form the above Durbin Watson value it seems that there is a presence of the auto correlation in the data set lag generations or transformations would be resolve this issue.

Table 4.1.2

From the above table the beta value of the exchange rate is -4011.980 means that there is a negative relationship exists among the exchange rate and the FDI therefore, our null hypothesis is not accepted. The VIF values indicate that there is also a presence of multi co linearity in the data set.

Table 4.1.3

For resolving the issues of autocorrelation and multi co-linearity suitable transformations were applied on the data set in order to prepare the appropriate results. After applying the transformations the adjusted R Square value of the above table is -0.061 or -6.1% it means that the one unit change in the independent variable sets will bring out the -6.1% change in the variation of dependent variable. Form the above Durbin Watson value it seems that after the application of the transformation the problem of auto correlation in the data set has been resolved.

Table 4.1.4

From the above table the beta value of the exchange rate is -0.31 means that there is a negative relationship exists among the exchange rate and the FDI therefore, our null hypothesis is not accepted. After the application of transformations the problem of multi co linearity in the data set is also resolved.

4.2. H2: Real GDP has a positive impact on Foreign Direct Investment Inflow in Pakistan.

Table 4.2.1

The adjusted R Square value of the above table is 0.944 or 94.4% it means that the one unit change in the independent variable sets will bring out the 94.4% change in the variation of dependent variable. Form the above Durbin Watson value it seems that there is a presence of the auto correlation in the data set lag generations or transformations would be resolve this issue.

Table 4.2.2

From the above table the beta value of the real GDP is 4243.439 means that there is a positive relationship exists among the real GDP and the FDI therefore, our null hypothesis is not rejected. The VIF values indicate that there is also a presence of multi co linearity in the data set.

Table 4.2.3

For resolving the issues of autocorrelation and multi co linearity suitable transformations were applied on the data set in order to prepare the appropriate results.

After applying the transformations the adjusted R Square value of the above table is -0.061 or -6.1% it means that the one unit change in the independent variable sets will bring out the -6.1% change in the variation of dependent variable. Form the above Durbin Watson value it seems that after the application of the transformation the problem of auto correlation in the data set has been resolved.

Table 4.2.4

From the above table the beta value of the real GDP is -.438 means that there is a negative relationship exists among the real GDP and FDI therefore hypothesis is not accepted. After the application of transformations the problem of multi co linearity in the data set is also resolved.

4.3. H3: Democratic Government has a positive impact on Foreign Direct Investment Inflow in Pakistan.

Table 4.3.1

The adjusted R Square value of the above table is 0.944 or 94.4% it means that the one unit change in the independent variable sets will bring out the 94.4% change in the variation of dependent variable. Form the above Durbin Watson value it seems that there is a presence of the auto correlation in the data set lag generations or transformations would be resolve this issue.

Table 4.3.2

From the above table the beta value of the dummy variable/democratic government is -17128.3 means that there is a negative relationship exists among the dummy variable/democratic government and FDI therefore, our null hypothesis is not rejected. The VIF values indicate that there is also a presence of multi co linearity in the data set.

Table 4.3.3

For resolving the issues of autocorrelation and multi co linearity suitable transformations were applied on the data set in order to prepare the appropriate results.

After applying the transformations the adjusted R Square value of the above table is -0.061 or -6.1% it means that the one unit change in the independent variable sets will bring out the -6.1% change in the variation of dependent variable. Form the above Durbin Watson value it seems that after the application of the transformation the problem of auto correlation in the data set has been resolved.

Table 4.3.4

From the above table the beta value of the dummy variable/democratic government is -.107 means that there is a negative relationship exists among the dummy variable/exchange rate and FDI therefore, our null hypothesis is not accepted. After the application of transformations the problem of multi co linearity in the data set is also resolved.

CHAPTER 5

DISCUSSION,CONCLUSION, IMPLICATIONS, AND FUTURE RESEARCH

5.1 Conclusion:

There were number of positive and negative effects of this foreign direct investment. The positive effects of foreign direct investment are; the investment means that foreign currency is coming into Pakistan. Whenever any company may be multinational invested in this country in terms of direct investment it means that they invested their currency into the country. It increased the foreign exchange reserves which are good for host country as they can be used in payments of debts or any kind of imports etc. Secondly more goods and services have produced and which can be exported to outside countries; so more foreign exchange can be earns through it. Foreign direct investment directly linked with the economic development of the host country and it also give benefit to the base country as they can access raw materials, can avoid trade barriers, will be near to the markets, can take advantage of cheap labors and lack of rules in host countries. Due to benefits host countries and industrializes encourage foreign direct investment.

Foreign investment proved as very important for the developing countries. In poor nations it is proves as significant driver of development. FDI provides many of the developing countries with great benefits which helped them in achieving their economic growth. Through foreign direct investment there will be many things which are coming to the developing nations. There will be inflow of foreign capital and funds which you can term as hot money coming to country. This capital can be invested into your business sectors to make it more worthy and profitable. Secondly there will be transfer of skills and technical expertise as if their entrepreneurs will come into your country and combine all the factors of production so then after results will be greater and larger than before. New technologies in shape of new capital equipments and software which can make factories totally automated will lower all the average costs and make it more efficient that it ever can be.

Besides all of these sometimes local firms can also be squeeze out of the market due to the inferior equipment and much smaller resources than the large giants with foreign investments. This is the work of government that how they reshape their policies to bring in foreign direct investment into your favor and not letting down the overall economic conditions. Profits which may earn here can also be sent back to the base country rather than kept for the re investment in the host nations. Some multinationals also impose their cultures in the people of the host country. To avoid all this state should interfere with all the consumer protection laws, unfair competition, laws for employee protection, environment protection and also of location of industry.

5.2 Discussion and implication:

Apart from these things when foreign investment comes into the country so then means that new opportunities could be created for many other firms too like they supply components and other things to the companies who are operating over here and has invested which will generate more employment and income for the citizens. Local firms can also be motivated to bring their quality up to the international standards as if they are supplying components to the multinationals. This thing will improve their productivity and it is good for the country so foreign direct investment is very beneficial.

Foreign direct investment will bring in investments and hot inflow of money and capital along with the tax revenues for the government even after some exemptions. Companies or individuals who operate in your country after investment will pay some taxes to the government too. Government can re invest those revenues in other sectors for the welfare of the general public like in health or education sectors etc.

5.3 Future research:

For future research, there are many advantages of high GDP rate like people can have more goods and services to consume; it will raise their living standards, secondly excess goods can be exported to outside countries so that foreign exchange can be earn through it. Higher GDP will give good image to the country in terms of many things; more and more foreign investors will come with their investments. People will be earning more so they can afford more other goods to purchase and secondly more incomes means more taxation for the government which it can spend on many other projects like schooling, health, defense, crime control etc. growth should result in improved standards of living in the country and higher profitability for the business.