Determinants of Foreign Direct Investment in Pakistan

Abstract

Objective: This study investigates the key determinants influencing Foreign Direct Investment (FDI) inflows into Pakistan over the period from 1990 to 2024

Methodology: The study employs time series econometric methods including the Augmented Dickey-Fuller (ADF) test for stationarity, the Autoregressive Distributed Lag (ARDL) bounds testing for co-integration. Variables of the Study: The study use FDI as dependent variable while GDP, inflation, unemployment, trade openness, exchange rate and government debt as independent variables. Main Findings: The empirical findings reveal that GDP and trade openness positively influence FDI, suggesting that economic size and market accessibility are attractive to foreign investors. Conversely, high inflation and higher government debt deter investment, signaling macroeconomic instability. Exchange rate volatility also shows a negative association, while unemployment exhibits mixed results depending on model specification. Practical Implications of Findings: These findings carry practical implications for policymakers aiming to enhance the investment climate in Pakistan. Emphasis should be placed on stabilizing inflation, ensuring exchange rate predictability, and promoting economic reforms that increase openness and reduce fiscal imbalances. 

Key Word: FDI, Exchange Rate, Trade openness, ARDL, ADF, ECM.