Introduction investment performance without brilliance in this regard

Introduction

Foreign
direct investment is defined as the source of acquisition of managerial control
by a business enterprise of a foreign country over a business activity in a
host country ”Graham 1982″ the primary advantage of the FDI is the
opportunities they contribute to move faster economic growth (Collins et al
1999). Foreign direct investment plays remarkable role as a source of financing
to a many developing countries ( Moosa, 2002).in recent years foreign direct
investment sketch for more than 60 percent of the private capital flows in
developing countries ( world bank, 2006). Figures of FDI of Pakistan have seen
mixed tendency over the last twenty years throughout 1990s, it sustained little
amount as foreign direct investment because of its reliance on debt (Hukro and
Ghumro, 2007). Even after liberalization and an encouragement for the investor
to mesmerize foreign direct investment performance without brilliance in this
regard (Khan and Kim 1999) but that tendency changed after 1999 and Foreign
Direct Investment from 322 million in 2000 to 2001 increased to 3.52 billion in
2005 to 2006.

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Rising
Foreign Direct Investment can be used for example one of the measuring an
increasing economic globalization during last three decades there has been a
tremendous growth in global of Foreign Direct Investment, there had been 6.59%
w GDP and come up to the total stock of Foreign Direct Investment in 1981,
during in 2004 the portion of GDP had rose to compact to 23.52% as claimed by
the United Nations Countries of Trade and Development Report (UNCTD 2004), this
had been arose simultaneously caused by substantial growth in international
trade.

The
market internationalization has stimulated companies to compose various
approaches to globalize business which outcome in immense activities such as
Foreign Direct Investment the IMF (international monetary fund) defined the FDI
as the investment that requires a long-term correlation reflecting aftermost interest
of a resident institution in one economy (direct investor), in an organization
local in an open economy other than that of the investor , claimed by the world
bank, FDI concerns to the net inflows of investment to obtain a final
management interest (10% or higher of voting stock) in an venture handling in
an economy relative to the investor and can be additionally developed as the
sum of equity capital reinvest of receiving other long term capital and short
run term capital as expose in the stability of remission in that economy. It is
predominantly seen as a complex roll of capital merchandize and technology and can
expand the prevail stock of knowledge in the hostess country (De Mello 1999)

Regardless
the magnificent increase in FDI during the last 10 years Pakistan FDI inflow
endure negligible when compared with other developing countries, in 2007 the
capital inflow of developing countries appears a 7.5% of GDP but according to
Pakistan that portion was only 4%, again the country facing a decline in FDI
stock solely reaching 3.72 Billion in 2009 from 5.4 Billion in the precursory
twelve months (Bloomberg), this decline can be donated different factors
ranging from vulnerable political environment to dispute between investor and
the government the conglomeration of FDI with the social economic, political
and financial parts of the host country make them remarkable determinants of
the FDI flow to the host country (Hanif, 2001).

Exchange
rate is a bulk crucial constituent in an open economy it has direct impact on
the macroeconomics constituents typical of FDI and GDP economics investor and
policy fabricators concentrated on the exchange rate of country and then
construct investment their money in the forge country, they have convinced that
rose in exchange rate formulates competitive merit in an international trade by
an expanding exchange rate of a country the indigenous export goods become
inexpensive and it also swells the demand of export, it means worldwide demand
of goods will elevate and import will be reduced , it effects on FDI all of the
impacts eventually on GDP of the country ( khan eta al 2012).

The
magnification of intercontinental flows of goods and capital infers that
international financial system is becoming growingly unified as economic activity
is expanded throughout the boundaries. Foreign Direct Investment is an
indispensable slice in the globalization route of an exertion as it augments
the dealings between states, regions and Multinational Corporations. Globally
progressing of Foreign Direct Investment, global trade, information and
expatriation are all parts of this development. This paper scrutinizes
different constituents of FDI using data for FDI. First motive that the
researcher choices this subject has been made in order to let for the
prospective of finding conclusions that can pledge knowledge about the nature
of FDI with the sight to help the policy makers of the hostess country and the
investing country to take acceptable decisions for the development and grow of
economies to both countries.

 

1.2: OBJECTIVES OF THE STUDY

the
objectives of this inquiry were to evaluate the relationship between Foreign
Direct Investment and factors which influence the Foreign Direct Investment of
Pakistan, in this study an attempt has been made to examine the empirical
research of Foreign Direct Investment of Pakistan for the influence of
different factors on Foreign Direct Investment in Pakistan. The aim of this
study is to empirically scrutinize the causations that are liable of the
legible FDI inflow to Pakistan.

ü  To
examine the relationship between export and FDI inflows of Pakistan from
January 2010 to December 2015

ü  To
ensure the relationship between import and FDI inflows of Pakistan form January
2010 to December 2015

ü  To
investigate the relationship between exchange rate and FDI inflows of Pakistan
from January 2010 to December 2015

 

1.3: SIGNIFICANCE OF THE STUDY

Factors
influencing FDI are in favor topic among researchers though, there had been a
lot precursory studies done on the factors of FDI in Pakistan. In this scrutiny
will accords to policy makers, like state bank of Pakistan and the federal
government as it gives them overall view of what variables are consequentially
influencing FDI inflows in Pakistan. The researchers had taken some crucial
economic factors identical export, import and exchange rate. This study outcome
can perform as a recommendation or remark about, to state bank of Pakistan and
Federal Government in order to composing monetary and fiscal policy to meet up
with an inclination of Direct investors who’s considering to invest Pakistan,
more over these can avert policymakers from concentrating on the dispensable
space misuse in an endeavor to captivate more FDI

 

 

 

2.0: Literature Review

2.1: Foreign Direct Investment

 FDI is defined as cross-border investment by a
resident entity in one economy with the objective of obtaining a lasting
interest in an enterprise resident in another economy. The lasting interest
implies the existence of a long-term relationship between the direct investor
and the enterprise and a significant degree of influence by the direct investor
on the management of the enterprise. Ownership of at least 10% of the voting
power, representing the influence by the investor, is the basic criterion used,
(OECD, 2013).

The
footprint of FDI on growth materialize to be positive in case of export encouraging
countries not in an inquest of small developing economies Bhagwat (1998).

The
configurational change in external accounts of a country came about
attributable to FDI inflows Lehman (2000). Other researchers examine that the
FDI determinants with in South Africa by posting co-integration along with
error correction skillfulness (Fedderke and Romm ,2004). this detecting
validated that political gamble, market size, poverty rights, Labor cost,
openness and corporate tax rates were vital variable that attract FDI.

During
the period between 1961 to 2003 there was identified empirical that the
variables of FDI progress in Pakistan, in that period two authors used
co-integrating along with error correction mastery for identified factors which
effect level of FDI (Aqeel and Nishat, 2005), these terminations had present
that corporate tax rate, import tariffs, exchange rate, devaluation of Rupee
and liberalization measures had positive and significant relationship with FDI.
Another investigation showed that the previous impact of an inflow of FDI Bop
is efficacious but the medium term impact could become positive sign or
negative sign as the investors expand their imports of intermediate goods and
services and starting to send back profit (Hossain, 2005).

(Asma
and Luqman, 2008) scrutinized impacts of a heterogeneity of economic influences
on FDI inflows, in to Pakistan, Indonesia and India for the interval of 1971 to
2005, these writers developed that the infrastructure, market size, domestic investment,
trade openness, infrastructure return on investment had remarkable and positive
correlation while external debt, indirect taxes had link and negative
correlation with FDI inflows. (Yol and Teng, 2009) investigated short run and
long run domestic variables influencing FDI in Malaysia through Co-integration
econometric analysis coating interval of 1975-2006. The outcomes rendered that GDP,
exchange rate and infrastructure positively whereas exports negatively upshot
FDI in long run, during short run GDP, infrastructure and exports have negate
sign whereas openness and exchange rate have positive sign effect. (SHENG and
Hue, 2012) deliberated on the empirical analysis of factors accomplishing
china’s FDI, they build econometric analysis on the data of china’s FDI and
factors like exchange rate, GDP, CPI, local consumption level and total export
during the interval of 1983 to 2011, the verifiable findings presented that
exchange rate, export GDP, CPI, have a notable influence on chine’s FDI. There
are utmost bounds analysis to the data of the diverse catalyst volatile of FDI
inflows in Bangladesh they launch FDI and domestic investment have a positive influence
on Economic Growth. (Busse and Groizard, 2008) identified that as contrasted to
the less synchronized countries, the more controlled economies are lack allowed
to take benefit of the existence of transnational companies. These findings are
further corroboration of the fact that valid host countries attributes can lead
to a positive effect of foreign investment inflows on growth rates. (Collins et
al 1999) advocated that the capital inflows to a country are naturally effected
by the domestic economic order of the host the propulsive for FDI are
dissimilar for disparate type of FDIs the operative could be market searching
and coherence seeking (Hanif ,2001).

It
is extensively conjecture that the tendency concerns globalized production and
marketing has utmost inferences for developing countries glamour to FDI the thunder
of FDI inflow to the developing countries as long as prior 1990s designated
that international endeavor have growingly extent these host countries to be
gainful investment location at the same time, assorts experts claimed that the
principles of and inspirations for FDI in developing countries have altered in
the approach of globalization , as a outcome it will no longer be plenty to
provide encouraging markets in order to generate FDI inflows policy makers
would encounter comparatively multiplex trial in venturing  for locational glamour to FDI ( Kokho 2002).

Tariff
bounding of FDI to assist enormous preserved markets should have become
slighter germane as assorted developing countries have nurtured their import
and control and reposed exhibition necessities such as regional satisfied rules
separate from one sided liberalization consecutive series of multilateral
commerce liberalization have decreased the pertinent of market entrance throughout
FDI for multitudinous products (UNCTAD 1998). contemporary explorations also
advocate that FDI is progressively allude to by some industries to wedge up the
merit chain and to outsource slighter fewer human capital rigorous juncture of
the production procedure to beneath / lower income countries contributing the pertinent
relative  prigileg.

The
theoretical cogitating for this scrutiny predominately handle from the prevail
literature on the inspirations and coherent behind firm’s overseas
augmentations and arrangements of (MNCS), the literature of FDI encourages venture
to identify and investigate national “pull” factors that allure Foreign Direct
Investment the “Pull” constituents range from the conceivable market magnitude
and penetrability to specialist ,labor and Natural resources to consistently
restrictions and the growth rate of hostess countries (Bajo-Rubio and
Sovilla-Rivero et al ,1972-1994).

(Dunning
,1981,1988) contrast in Foreign Investment due to disparate countries of
origine are exhibited in the capacity of investing firms to utilize spot
particular endowment as well as possession edges the place component of the
extensive theory culminates the significance of 
country specific constituents as critical benchmark for country
selection, while Dunning’s miscellaneous theory is focused at describing FDI conduct
at the firm level this systematic frame work is willingly pertinent to the
national level analysis by investigating the divergence in specific national
constituents of both host and source countries and their consequence on the
clustered outflow of FDI , a limited number of research have entrenched some
verifiable affirmation on the link between national constituents of provenance
countries and FDI in the US. Two classifications of constituents have been
launch to regulate the level of FDI national economic variables and
sociopolitical variable, one of the preliminary researches by (Ajami and Barniv
1984) established that exports to the US FNP and Interest rates of origin
countries were remarkable in describing the divergence of FDI in the US, other
investigators in the identical topic area affirmed the consequences of GNP on
FDI but went one stride besides counting more illustrative variables in their
study  the the detections of the
investigators divulge that the aligned of an economic development rhythmic by
GDP per capita isobilateral and intra industry trade ,R &D potency exchange
rates and capital fetches of reference countries also sequel FDI inflows to the
U.S.

 

 

2.2: Relationship between Exchange
rate and FDI

There
are two squabble idea which include the argument of production pliability and
squabble of risk aversion. As claimed by first squabble there is a direct
relationship between the variability of FDI and exchange rates, the second
argument defines that their reverse relationship between these variables
separately, when lining the side of the coin the FDI host country can also inducement.
An inflate of exchange rate with the outputs or inputs with dismay staring
(Sttar and Rehman 2012).

Countries
manipulating currency   strive to effect
FDI inflows from countries using the fragile currency, the cash flow guides to
the present of FDI. The contemporary literature about the abstract of the
impact of exchange rate, alters on FDI flows launch with assumption of absolute
capital versatility in the world after 1990, more over there are various
hypothesis which describes how FDI flows responses to swaps in the level of
exchange rate. One of them is the rich position assumption for this hypothesis,
FDI nearly looked on the foreign exchanges market by the effect of modifies in
the level of exchange rate on the comparative wealth of the two countries of
destination and outset ( Bleaney and Greenaway, 2001).

The
task of exchange rate in the quantity of FDI inflows the host country, at the
section level they scrutinize various types of with in FDI to the U.S and they
proposed that the devaluation of the Dollar in host country conduct to a rise
in the magnitude of FDI inflows the cause is ascribed to rise in the wealth of
investors and decline in the cost of investment. The preponderance crucial they
develop a firm negative relationship between the level of the exchange rate and
within FDI in the industry of manufacturing. The second hypothesis concerning
the effect of alter in the level of exchange rates on FDI flows is known as the
cost of labor hypothesis comparative to the literature. The devaluation of the
hostess currency inspires more FDI inflows ascribed to the depletion in the
cost of production day one day and grasps more foreign investors (.Froot and
Stein, 1991)

 

 

 

3.0: RESEACH METHODOLOGY

This research is a
quantitative research in terms of its application it is an empirical study on
the factors effecting foreign direct investment in Pakistan. Also in
methodology we describe the methods and outlook used together data. Moreover,
research methodology chronical narrates the research activity and how to
operate them.

3.1:
Types of Data

In generally there are
two types of data used in the researchers one is primary data while the other
one is secondary data. we will use secondary time series data. Our data
contains the variables Foreign Direct Investment, Exchange rate , Export and
Import, these data comes from different sources like Pakistan state bank, www.x-rates.com/avarage/from
Pakistan Rupee to USD in 2007 to 2016, another source that data comes from is www.witis
.com

3.1.1:
Selected variables in this study

Ø  Dependent variable

Foreign
Direct Investment

Ø  Independent variables

Export
of Goods and Services

Import
of Goods and Services

Exchange
Rate

3.1.2: Description of variables

·        
Foreign
Direct Investment

Foreign Direct Investment
is the investment pledge by an institution resident of one economy in an
endeavor resident in a dissimilar economy, with the purpose of acquiring and
encouraging a lasting interest in the endeavor and also to exertion a major
level of effect in its management.

·        
Exports

One of the nearly all
crucial indicators of economic growth is sell abroad goods, which have an
influence of the stretch of freedom or trade barriers, to increase up the
economy, implicit non-tariff barriers on exports to rise up our exports.

 

·        
Imports

An import is a good
brought into a control, especially throughout a national border, from an
outward source. the party bringing in the good is named an importer, an import
in the receiving country is an export from the sending country.

·        
Exchange
Rate

in finance an exchange
rate is the rate at which one currency will be equivalent or exchanged for
another currency, it is also contemplated as the usefulness of one counter’s
currency in link to another currency

 

3.2:
Model Specification and statistical techniques

we used the following
model for this study, we chose the variables which are influencing the FDI
inflow in Pakistan from the period of 2007 to 2016

FDI=
F (EXCH, IMP, EXP) …………………………………………………….
(1)

Where,

FDI=         Foreign Direct Investment

EXCH=    Exchange Rate

IMP=        Import Goods and Services

EXP=         Export of Goods and Services

x

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