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Estimating the key determinants of foreign direct investment flows in Pakistan: new insights into the co-integration relationship

Hummera Saleem (Department of Economics, NUML University, Islamabad, Pakistan)
Malik Shahzad Shabbir (Lahore Business School, University of Lahore, Lahore, Pakistan)
Bilal Khan (Department of Accounting, Wuhan University, Wuhan, China)
Shahab Aziz (Department of Management Sciences, Bahria University, Islamabad, Pakistan)
Maizaitulaidawati Md Husin (Azman Hashim International Business School, University of Technology, Kuala Lumpur, Malaysia)
Bilal Ahmed Abbasi (Department of Management Sciences, University of Azad Jammu and Kashmir, Muzaffarabad, Pakistan)

South Asian Journal of Business Studies

ISSN: 2398-628X

Article publication date: 27 July 2020

Issue publication date: 3 February 2021

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Abstract

Purpose

This empirical analysis tries to examine determinants of private foreign direct investment (FDI) in Pakistan using the bounds test approach. Main determinants of FDI among them are the size of the market (Q) macroeconomic stability (r), political stability (PRS), real exchange rate (REX) and institutional quality (INQ).

Design/methodology/approach

This study used annual time-series data set starting from 1980 to 2016. This study has used time-series data with ARDL and error-correction model (ECM) and examined main determinants of FDI for Pakistan. The study used the Granger causality test (modified WALD test) to identify the causality among the variables.

Findings

Moreover, empirical findings indicate the long-run relationship between GDP, trade openness and institutional quality toward FDI. However, political instability, inflation and real exchange rate harm FDI in Pakistan. Furthermore, results of Granger causality indicate that the bidirectional causality running from FDI and Q toward FDI is significant, providing evidence of FDI-led growth hypotheses in Pakistan. This study determines the correlation between FDI and Q (GDP growth) related to the “feedback hypothesis” in the short and long run. This study also concludes that the short-run causal connection among FDI, REX, PRS, r and Q follows the “feedback hypothesis.” This describes that FDI, REX, PRS, r and Q variables are jointly determined and affected together.

Originality/value

This study also explores the causal association between FDI and its significant determinants, by using methods of Granger causality test and the approach of Toda-Yamamoto-DoladoLutkephol (TYDL) to examine the causal relationship and its directions among these variables.

Keywords

Acknowledgements

The authors are grateful to the anonymous referees and the editorial team of the journal for their beneficial suggestions to improve the quality of the article.Funding: The authors have not received any financial support for the research, authorship and publication of this article.Declaration of Conflicting Interests: The authors declared no potential conflicts of interest concerning the research, authorship and publication of this article.

Citation

Saleem, H., Shabbir, M.S., Khan, B., Aziz, S., Md Husin, M. and Abbasi, B.A. (2021), "Estimating the key determinants of foreign direct investment flows in Pakistan: new insights into the co-integration relationship", South Asian Journal of Business Studies, Vol. 10 No. 1, pp. 91-108. https://doi.org/10.1108/SAJBS-07-2019-0123

Publisher

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Emerald Publishing Limited

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