M PRA

Munich Personal RePEc Archive

The impact of foreign direct investment

(FDI) on economic growth
Shoaib Shafique and Zahid Hussain
Riphah University Lahore

4. July 2015

Online at https://mpra.ub.uni-muenchen.de/66337/
MPRA Paper No. 66337, posted 29. August 2015 04:30 UTC

The impact of foreign direct investment (FDI) on economic growth

ShoaibShafique
[email protected]
ZahidHussain
[email protected]

Introduction:

Foreign direct investment (FDI) has gotten distinguished and the most gainful strategy for
drawing streams originating from external assets. The use of this technique has likewise
transformed into a significant piece of making financing capital flow into nations around the
world. For developing nations far and wide, this productive impact joined with foreign
transactions has developed constantly well and is referred to as an instrument for investment
development (Muhammad, 2007). FDI has numerous benefits on creating better economic
output, for example, it raises profit level for entrepreneurs, reduces unemployment and opens
avenues for fares and innovative headways for financial gurus and nations.

The role of FDI in creating better national output is crucial, it increases opportunities for
work and use of human resources, FDI serves to lessen planning shortages by executing new
business approaches. An alternative benefit of FDI is that it does incorporate the risk and
regulation of foreign commitment1 and increments that worth the human capital via obtaining
skilled workers for countries that suffer from the deficiency of capital and imaginative
smoothness regularly experience the advancement slower than those that doesnt. As per
numerous studies, foreign business prompt can undoubtedly give a path toward growth
associated with both mechanical skill and information (Dunning &Hamdani, 1997).
1

Chaudhuri, S., & Banerjee, D. (2010). FDI in agricultural land, welfare and unemployment in a developing
economy. Research in Economics, 64(4), 229-239.

The specific examination objective is to investigate this effect associated with foreign direct
investment (FDI) in Pakistan. Pakistan is generally a small area having a chronicled legacy
with quickly developing populaces. Pakistans ex general economy to a great extent is
subordinate after cultivating, and every capita benefits is decreased.

In this paper we will look at the relationship between FDI and GDP for the period 2002 to
2012. Pakistan is creating output with quickly expanding populaces. Agribusiness has
prevailing impact in economy according to capita salary is low because of which it confronts
destitution issues. Subsequently the fundamental goal of macroeconomic strategy producers
is to build FDI in nation. Pakistan is struggling to go in the present day world and being the
first part of SAARC (South Asian Association for Regional Cooperation) and a standout
amongst the most paramount nations of this region favoured with huge amount of assets as
mineral possessions, dense labour population, agribusiness innovation and other good skilled
characteristic assets. FDI assumes an extremely crucial part in its future development and
improvement. FDI is vital for creating nations as well as offers profit to speculators
additionally we can say that it produces winning circumstances to both ends.
Living a better life by earning is considered as IBADAT in every religion. As we know that
Islam provides a complete code of conduct for every person and at every level. Our beloved
Prophet Muhammad (PBUH) was himself atrader and he took merchandise from one city to
another and invested the profit he earned in the business, favouring retained earnings in a
business for the business to grow.
There are many Quranic verses and Ahadith that cover this topic such as:
There is no sin on you if you seek the Bounty of your Lord (during pilgrimage by trading
etc.).(Aayah No. 198, Surah Al-Baqarah, Chapter No. 2, Holy Quran).

Hazrat Abu Hurairah (May Allah be pleased with him) said: The Messenger of Allah
(PBUH) said, "O people! Allah is Pure and, therefore, accepts only that which is pure. Allah
has commanded the believers as He has commanded His Messengers by saying:
`O Messengers! Eat of the good things, and do good deeds.' (23:51) And He said: `O you who
believe (in the Oneness of Allah - Islamic Monotheism)! Eat of the lawful things that we have
provided you...''' (2:172). Then He (PBUH) made a mention of the person who travels for a
long period of time, his hair are dishevelled and covered with dust. He lifts his hand towards
the sky and thus makes the supplication: `My Rubb! My Rubb!'But his food is unlawful, his
drink is unlawful, his clothes are unlawful and his nourishment is unlawful, how can, then his
supplication be accepted?''[Muslim Hadith # 2214].Holy Quran directs us O those who
believe, become true believers. Quran also says, O those who believe! Should I guide you
towards a trade which shall save you from a painful punishIn the light of these directions,
there is a need to spell out the challenges which may hinder the complete Islamization of
whole economy and society. We dont have any other option as Allah directs us to enter into
the fold of Islam entirely and completely
From these references we can understand that Islam appreciates trade because trade brings
investment and flow of money in society. What we should consider is just not to invest or
bring investment from prohibited resources. The first thing is to understand what Halal and
Haram is. Halal is permissible, Haram is to be avoided. Whether it is earning the income or
expenditures, production or exchange; whatever may be the form of economic activity, Halal
(Permissible) and Haram ( Forbidden) have to be kept in mind.
Literature review:

There are many studies on the foreign direct investment and economic growth that has been
conducted by various scholars few were done locally and major were internationally,
2

Pakistan was one of those countries where empirical studies has been reviewed critically the
purpose of those researches was to evaluate most critical consequences and policy
recommendations by Falki (2009) Foreign direct investment had a statistically destructive
result on the
gross domestic product. Likewise, Agarwal (2000) also believes that FDI has a negative
impact on GDP till 1980, but its impact seems to be positive afterwards.
Whereas, Adam &Tweneboah (2009), found that FDI has a positive impact on economic
growth and stock exchange of a country. The positive impact of FDI depends on many
factors. Along with the economic factors, social and environmental factors of the receiving
country effect the result of FDI on GDP (Buckley, et al. 2002).Anyamele (2010) inspected
the crash of education, export and FDI upon economic extension in SSA (Sub-Saharan
African Nations). He reasoned that and FDI had remarkable effects on fares and financial
development of Sub-Saharan African Nations.Authokorala (2003) endeavoured to look into
the effect of FDI on the economic development of Sri Lanka. The key discoveries
recommended that there had been the weakest connection between economic development
and FDI on account of Sri Lanka. He inferred that this negative relationship is an aftereffect
of political instability, absence of great administration, and the bureaucratic latency. Zhou at
al., (2002) confirmed the effect of FDI on the effectiveness of the provincial firms utilizing
yearly information over the period 1970-2001 in China. Similarly (De Gregorio, 1992)
examined 12 Latin American Countries and found the positive and significant impact of FDI
on economic growth the study also showed that efficiency of FDI is higher the national
investment.

In numerous surveys, FDI could increase unemployment in developing countries as argued

by Jaouadi (2014)2, for the author, foreign investment could have negative effects on the
employment of youth.
The exact examination indicated that FDI had pushed a positive impact on the local level
against on the industrial level.An imperative study by Abbas et al. (2011) was conducted on
SAARC countries,by using multiple regressions they found that FDI has appositive
relationship with GDP whereas negative relationship was found between CPI and GDP.They
used threshold regression analysis.According to a study the GDP and human capital are
dependent by the FDI expressively.Which show that initial GDP and human resources are
key drivers of FDI. Alfaro et al (2004) also carried out a parallel examination to find
relationship between FDI and GDP. The study showed that solid financial system of a
country is capable of attracting FDI. A study by Shabir and Mahmood (1992) examined the
relationship between foreign private investment FPI and economic growth in Pakistan,the
study determined that net foreign private investment (FPI) had a positive impact on the rate
of growth of real GNP. Likewise (Ahmed, et.al, 2003) also found positive relationship of FDI
on domestic growth. As we said above that FDI along with economicdevelopment also brigs
technological reforms Boreztien et al. (1998) found that FDI carries technology and advanced
growth in rising countries if these countries have minimum stock of human capital.
Hypothesis:
FDI (Foreign Direct Investment) has positive impact on GDP Gross Domestic Product).
3. RESEARCH METHODOLOGY:

Said Jaouadi (2014), Could Foreign direct investment increase unemployment: case of KSA, The
international journals research journal of economics and business studies, Vol 3, N9, pp: 51 56.

The objective of this research paper is to find the impact of FDI on GDP. We use data of 10
consecutive years from 2002 to 2012. As the ministry of finance is consideredone of the most
reliable and authentic sources of data collection therefore secondary data of above mentioned
variablesare collected from ministry of finance (economic survey of Pakistan).
The centralaim of the paper is to study the effect of FDI on GDP of Pakistan. In Pakistan
relevance is observed between foreign direct investment inflows and economic growth of the
country. To evaluate the relationship between economic growth of Pakistan and foreign
direct investment, thefollowing regression model is used:
GDP = + 1 FDI +
Where, FDI = Foreign DirectInvestment, GDP = Gross Domestic Product. The abovementioned Regression Model was run on SPSS to discover the impact of FDI on the Gross
Domestic Product of Pakistan. Regression model is run to discover the impact of FDI on
GDP for the period 2002 to2012.FDI is used as independent whereas GDP as depended
variables. Following are the descriptive statistics of GDP and FDI,
3.1 Measures the Output (GDP)
We used GDP,as adependent variable in regression model mentioned in equation 1.Data from
2002 to2012 was taken from the Ministry of Finance.Years are showed on X-axis whereas
GDP in % on Y-axis. Fluctuation trend of GDP can be seen in 10 years.
Figure 1: GDP

GDP
10
8
6
GDP

4
2
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source:Pakistan Economic survey (Ministry of Finance).

3.2 Measures the Input (FDI)
FDI is used as independent variable on Regression Model mentioned in equation 1.data on
FDI was also collected from Ministry of finance for the period 2002 to 2012. The vertical
axis (X- axis) is the year and horizontal axis (Y-axis) is FDI in (%).FDI shows fluctuation
trends in above mentioned years.
Figure 2: FDI

FDI
4
3.5
3
2.5
2

FDI

1.5
1
0.5
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Pakistan Economic survey (Ministry of Finance).

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4. EMPIRICAL RESULTS:
Succeeding regression model is used to test the impact of FDI on GDP
GDP = + 1 FDI +

Table 1
Empirical results of GDP and FDI

Coefficientsa
Model

Unstandardized Coefficients

Standardized

Sig.

Coefficients
B
(Constant)

Std. Error
3.866

1.451

.243

.692

Beta
2.664

.029

.351

.734

1
FDI

.123

a. Dependent Variable: GDP

b. Independent variable: FDI

The empirical findings are represented by the above tables. The results of slope coefficients
of input(FDI) in regression analyses showed positive impact on gross domestic product.it
shows that if there is 1% increases in dependent variable FDI it will effect GDP by.243%.but
this effect is not a significance (T=.351) and it must be greater or equal to 1.96. There are
many others economic and non-economic factors that affect GDP (=.692)of any country such
as Capital formation, Naturalresources,Human resources, Power, Education, political

instability, social and administrative so thats why the effect of FDI on GDP is not
significance.

Conclusion and Recommendations:

Investment plays a vital role in economic growth and infrastructure building of any nation
that will ultimately improve living standard of their people. There are many others factors
that affect GDP of any country so thats why the effect of FDI on GDP is not significance but
we can say that because FDI has a positive impact on GDP is government and other financial
sectors work hard to bring more and more inflows of FDI. As we know that I=S and in under
developing countries S is very low which so thats y investment is also low.so to increase
investment such countries are highly depended on FDI, it is considered as supplement or
backbone of economic development of under developed country.
It was proven form literature review and from our results that FDI positively contributes
toward economic growth of any nation. Pakistan is under developed country it has very low
ratio of savings so to increase investment it is highly depends on FDI.it is a duty of local
government to tack such actions that attract investors to invest and economy of our country
can grow. After reviewing literatures we can give some recommendations to increase FDI.
Policy makers can take guidelines from these recommendations. First of all, the government
should build an environment conducive to business activities such as creating investment
opportunities to attract foreign investment and simultaneously encourage local investors, if
the local investors interests are appreciated and carry weight in the eyes of the government,
their rights protected, and benefits awarded to them, then foreign investors can easily be
attracted. Secondly, there should be proper education for labour to become skilled as by
educating the labour force of the country, labour productivity will rise and the investment
will be beneficial. Government should bring economic reformation by transfer of resources to

more productive sectors from less productive sectors to get optimal benefit from investment.
Political stability and law and order situation are important drivers that influence investors
mind so government and other regulatory authorities must improve these two.Self-reliance is
must. Unfortunately Pakistan depend on the loans from the west. For the time being it may
be unavoidable but we must take care to preserve our identity and not let the loan offerers
influence our decisions. We must make our decisions in the light of our vision and values.
We must not lose our identity and try to reduce dependence on loans as much as possible.
References:
1. Abbas, Q., Akbar, S., Nasir, A., Amanullah, H. &Naseem, M. (2011) Impact of
Foreign Direct Investment.Global Journal of Management and Business Research,
Volume 11 Issue 8 Version
2. Adam, A. &Tweneboah, G. (2009) Foreign Direct Investment and Stock Market
Developments.International Research Journal of Economics Issue, 26.
3. Agrawal, P. (2000). Economic Impact of Foreign Direct Investment in South Asia,
Indra Gandhi Institute of Development Research.
4. Ahmad, M.H., Alam, S. And Butt, M.S. (2003) Foreign Direct Investment,
Exports, and Domestic Output in Pakistan. The Pakistan Development Review,
Vol. 42, No.4, pp. 715-72391
5. Chandab, A. &Ozcanc, S. (2004) FDI and economic growth: the role of local
financial markets. International Economics issue, (64) page 89-112.
6. Dunning, J. &Hamdani, A. (1997) Thenew globalism and developing countries.
Tokyo; New York: United Nations University Press.
7. Falki, N. (2009) Impact of Foreign Direct Investment on Economic Growth in

8. Jaouadi, S. (2014), Could Foreign direct investment increase unemployment: case of

KSA, The international journals research journal of economics and business
studies, Vol 3, N9, pp: 51 56.
9. Muhammad, A. (2007) Economic Growth and Foreign Direct Investment: The
Role of Domestic Financial Sector, PIDE Working Papers 2007:18
10. Shabbir, T. &Mahmood, A. (1992) The Effects of Foreign Private Investmenton
Economic Growth in Pakistan. The Pakistan Development Review, Vol. 31(4) pp.831841
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