Pakistan Institute of Development Economics

THE PAKISTAN DEVELOPMENT REVIEW 

Do Political Leaders Affect Sectoral Composition of FDI Inflows to Favour their Constituencies in Pakistan?

The present study investigates the dynamic causal relationship between net inflows of skill intensive industry/sectoral FDI and different political regimes (a movement from autocratic to democratic government), to test our primary hypothesis that whether the political leaders favour their constituencies/median-voters by fiddling the sectoral composition of FDI inflows in Pakistan, to please them economically. Learning from the prior literature, we have categorised the median voter, the most populous, in low skill industry, while less populous in medium skill industry, and least populous in the high skilled industry. To address the question, that politically which industry fetch more FDI, we have employed novel Frequency Domain Spectral Granger causality (GC) test, using time series data, to our dynamic models, to gauge the cyclical fluctuations in causal relationship between political regimes and skill intensive FDI. The causal relationship between skill intensive FDI and political regimes is analysed with and without some confounding economic variables (e.g., trade openness, human capital and exchange rate) for the robustness of the results. Our findings show that, rather than political, there are some economic reasons cause to attract more FDI in low skill (sub)sectors. We have also found bi-directional causal relationship, in short as well as in the long run, for medium and high skill FDI-indicating the intentions of political interests in designing FDI sectoral distribution. However conducive economic environment is a fundamental confounding factor fetching FDI in different (sub)sectors of Pakistan economy, and in return, FDI has also instigated the development of political institutions by empowering middle class populace to participate more in the democratic process, the results reveal.

Muhammad Zahir Faridi, Rabia Nazir, Ghulam Murtaza, And Fareeha Armaghan

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