Pakistan Institute of Development Economics

THE PAKISTAN DEVELOPMENT REVIEW 

The Role of the Sectoral Composition of Foreign Direct Investment on Economic Growth: A Policy Proposal for CPEC and Regional Partners

This paper examined the sector-wise, i.e. agriculture, manufacturing and services, impact of foreign direct investment (FDI) on economic growth. The characteristics of a sector and its linkage to the rest of an economy mainly determines the potential impct of FDI on economic growth. Intutively, the potential linkage varies across the sectors and; hence, the sector-wise impacts of FDI might vary regarding economic growth. Empirical analysis used panel data of five countries namely China, Pakistan, India, Bangladesh and Sri Lanka over the time of 2000– 2015. Robust Standard Error Model is used for this study where the results show that magnitude of FDI only in agriculture and manufacturing sectors has significant positive impact on economic growth. The estimated results showed that the FDI in manufacturing sector has the largest potential as compared to the other sectors in increasing economic growth. The impact of agriculture sector is minor though significant while that of service sector is insignificant.

HAIDER ALI and MUHAMMAD TAMOOR ASGHER

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