The Causal Link Between Foreign Direct Investment (FDI) And Economic Growth In Pakistan Economy

Abstract

The impact of Foreign Direct Investment (FDI) on the economic growth of host countries, especially on the developing ones, is a major point of discussion by economists since 1980's. The study examines the impact of FDI on the factors of economic growth like gross domestic product (GDP), exports and imports of Pakistan by applying different econometric tests like Augmented Dickey Fuller (ADF) Unit Root Test, Johansen Cointegration Test, Vector Error Correction Model (VECM) and Granger Causality Test on time series data from 1981 to 2009. The result obtained proves that there is long run relationship between the macro-economic variables. It has been proved that FDI granger the growth process of host counties, but the result obtained is not confirmed in the case of Pakistan. But, the economic growth of Pakistan does granger the FDI influx. In the end, there is bi-direction causality between GDP and exports; and FDI and exports.