Pakistan Institute of Development Economics

THE PAKISTAN DEVELOPMENT REVIEW 

Determinants of Foreign Direct Investment (FDI) in Pakistan: Is China Crowding Out FDI Inflows in Pakistan?

The emergence of China as the world’s second largest economy, largest recipient of Foreign Direct Investment (FDI) and the single largest investor country in Pakistan have raised concerns that this success has been achieved at the expense of others. With this backdrop, the study finds out whether China is crowding out investment in Pakistan. The study uses the ARDL bounds testing approach by using annual data for the period 1980–2014. The locational factors, including market size, human capital, openness and infrastructure are all important determinants for FDI inflows. Once these factors are controlled for, China does not appear to crowding out inward FDI in Pakistan. China’s market size, its inward FDI and direct investment to Pakistan have positive and significant impact on the inflows of FDI in Pakistan. Besides, all locational factors i.e. market size of Pakistan, trade openness, human capital have showed positive and significant impact on FDI inflows. The effect of infrastructure is appeared to be negative as well as significant. The results support the conventional wisdom that the country with growth rates of GDP attracts the foreign investment as this growth indicates larger potential demand for goods. Furthermore, investors feel comfortable with more liberalised economic environment. Investment in human capital also plays a vital role to enhance inward flow of foreign investment.

FIAZ HUSSAIN and SHAHZAD HUSSAIN

 

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