Pakistan Institute of Development Economics

THE PAKISTAN DEVELOPMENT REVIEW 

FDI and Economic Growth in Pakistan: A Sector Wise Multivariate Cointegration Analysis

Liberal economic policies have promoted economic growth via Foreign Direct Investment (FDI) around the globe. This paper investigates this preposition by resorting to sector-specific FDI and GDP to Vector Error Correction Model (VECM) within panel cointegration methodology using domestic investment, infrastructure, human capital and institutions as control variables. For this purpose, Pakistani economy is disaggregated into primary, secondary and tertiary sectors. For FDI and GDP of primary sector, various economic groups such as food, beverages, tobacco, sugar, paper and pulp, leather and leather products, rubber and rubber products are used. Similarly, for secondary sector, chemicals, pharmaceuticals and fertilisers, petro chemicals and petroleum refining, cement, basic metals, metal products, machinery other than electrical, electrical machinery, electronics, transport equipment, power, construction, mining and quarrying, oil and gas exploration economic groups are used. For tertiary sector, wholesale and retail trade, tourism, transport, storage and communication, financial businesses, social and private services are used. Moreover, infrastructural and institutional index is derived using Principle Component Analysis (PCA). Although, the panel approach signified both long run and short run relationship between FDI and GDP but sector wise relationships are dismal. Only FDI of primary sector showed short run relationship with respective GDP. Moreover, no cross sector spillover exists between primary, secondary and tertiary sectors of Pakistan.

ADEEL AHMAD DAR, HAFIZ MUHAMMAD ALI BHATTI, and TAJ MUHAMMAD

 

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