Macroeconomic factors determining FDI impact on Pakistan's growth

Purpose ‐ The purpose of this paper is to identify major macroeconomic factors that enhance foreign direct investment (FDI) for Pakistan through the co-integration and error correction model over a 28-year time period, i.e. between 1980 and 2008. Design/methodology/approach ‐ The study employed the Johansen co-integration technique to estimate the long-run relationship between the variables, while an error correction model was used to determine the short-run dynamics of the system. Findings ‐ Finding suggests that FDI has had a significant positive impact on Pakistan's economic growth in the long run. For example, trade liberalization and their interactive terms have a positive effect in the short run, while a negative effect is observed in the long run upon economic growth of Pakistan. The results indicate that due to a low quality of human capital in Pakistan; the direct effect of FDI on economic growth becomes negative. Research limitations/implications ‐ The study was limited to a few variables, including human capital, trade openness, government size, population and consumer price index, in order to manage robust data analysis. Practical implications ‐ The authors find that for FDI to be a significant contributor to economic growth in Pakistan, government must focus upon improving physical infrastructure, and quality of human resources. Originality/value ‐ The study confirms that Pakistan did not enjoy substantial growth benefits from FDI because human capital, trade openness, government size and interactive terms of FDI and per capita income have a negative impact on economic growth. These findings have important policy implications.