Implications of Exchange Rate and Inflation Dynamics for FDI in Pakistan:An Econometric Analysis
Pakistan, like other developing countries across the world faces the resource constraint and attracts foreign capital in the form of foreign direct investment (FDI). This shortage of financial resources is caused due to gap between saving and investment. A number of factors affect the inflow of foreign direct investment, including variations in exchange rate and inflation rate in a country. The present study is conducted to explore the link between FDI and exchange rate and inflation rate. For empirical analysis it utilized annual data set ranging from 1975 to 2015 and applied econometric methodology of Vector Error Correction Method (VECM). The checking of time series characteristics of all variables is followed by testing the existence of long run relationship and finally estimation of short run and long run elasticities of the model. Major findings confirmed the existence of long run relationship between FDI and exchange rate and inflation. Major policy recommendations include the control on inflation rate and exchange rate volatility is important instruments to attract FDI inflows in Pakistan and hence raising the overall economic development standards.
- Abbas, Q., Akbar, S., Nasir, A. S., AmanUllah, H., & Naseem, M. A. (2011). Impact of Foreign Direct Investment on Gross Domestic Product. Journal of International Development. Vol 11.(8).
- Agrawal, P. (2000). Economic impact of foreign direct investment in South Asia. World Bank.
- Apergis, N., and Katrakilidis, C. (1988) "Does Uncertainty Matter in Foreign Direct Investment Decisions? An Empirical Investigation for Portugal, Spain, and Greece," Rivista Internazionale do Scienze Economiche e Commercialli, vol. XLV, No. 4, pp. 729-744
- Azam, M., Khan, M. A., & Iqbal, N. (2012). Impact of political risk and uncertainty on FDI in South Asia. Transition Studies Review, 19(1), 59-77.
- Azam, M., & Lukman, L. (2010). Determinants of foreign direct investment in India, Indonesia and Pakistan: A quantitative approach. Journal of Managerial Sciences, 4(1).
- Balamurali, N., & Bogahawatte, C. (2004). Foreign direct investment and economic growth in Sri Lanka. Sri Lankan Journal of Agricultural Economics,6(l), 37-50.
- Blonigen, B. A. (2006). Foreign Direct Investment behavior of multinational corporations. NBER Working Paper.
- Deutsche Bunde-sbank (2003). 'The role of FDI in emerging market economies compared to other forms of financing: Past Developments and implications for financial stability.
- Cushman, D. O. (1988). US bilateral trade flows and exchange risk during the floating period. Journal of International Economics, 24(3), 317-330.
- Cuyvers, L., Plasmans, J., Soeng, R., & Van den Bulcke, D. (2008). Determinants of foreign direct investment in Cambodia: country-specific factor differentials. University of Antwerp, Faculty of Applied Economics.
- Dewenter, K. L. (1995). Do exchange rate changes drive foreign direct investment?. Journal of Business, 405-433.
- Dhakal, D., Nag, R., Pradhan, G., & Upadhyaya, K. P. (2010). Exchange rate volatility and foreign direct investment: Evidence from East Asian countries. International Business & Economics Research Journal (IBER), 9(7).
- Fedderke, J. W, & Romm, A. T. (2006). Growth impact and determinants of foreign direct investment into South Africa, 1956-2003. Economic Modelling, 23(5), 738-760.
- Halicioglu, F. (2001). An Econometric Analysis of Foreign Direct Investment Flows into Turkey from Major Global Regions: 19751999. In International Conference in Economics V.
- Graham, J., & Barry, R. (2004). "Understanding foreign direct investment", Citibank International Business Portal.
- Iqbal, M. S., Shaikh, F. M., & Shar, A. H. (2010). Causality relationship between foreign direct investment, trade and economic growth in Pakistan. Asian Social Science, 6(9), 82.
- Kamaly, A. (2002). Evaluation of FDI Flows into the MENA Region. In 9th Annual Conference of ERF, Sharjah.
- Khan, R. E. A., Sattar, R., & Rehman, H. U. (2012). Effectiveness of exchange rate in Pakistan: Causality analysis. Pak. J. Commer. Soc. Sci, 6(1), 83-96.
- Kinaro, E. 0. (2006). Determinants of Foreign Direct Investment in Kenya.Institute African de Developpement Economique et de Planification. Dakar.
- Khaliq, A., & Noy, I. (2007). Foreign direct investment and economic growth: Empirical evidence from sectoral data in Indonesia. University of Hawaii at Manoa, Department of Economics Working Paper, (200726).
- Kiat, J. (2010). The effect of exchange rate and inflation on foreign direct investment and its relationship with economic growth in South Africa.
- Klein, M. W., & Rosengren, E. (1994). The real exchange rate and foreign direct investment in the United States: relative wealth vs. relative wage effects. Journal of international Economics, 36(3), 373-389.
- K.L. Mamun and H.K. Nath, Export-led growth in Bangladesh: a time series analysis, Applied Economics Letters, 12(6), (2005), 361-364.
- Khwaja, A. I. (2009). Can good projects succeed in bad communities? Journal of public Economics, 93(7), 899-916.
- Liu, X., Wang, C, & Wei, Y. (2001). Causal links between foreign direct investment and trade in China. China Economic Review, 12(2), 190-202.
- Pan, Y. (2003). The inflow of foreign direct investment to China: the impact of country-specific factors. Journal of Business research, 56(10), 829-833.
- Tuman, J. P., & Emmert, C. F. (1999). Explaining Japanese foreign direct investment in Latin America, 1979-1992. Social science quarterly, 539-555.
- Sawyer, W. C, & Sprinkle, R. L. ((2006)). International economics (2nd ed.):. Pearson Prentice Hall.
- Shamsuddin, A. F. (1994). Economic determinants of foreign direct investment in less developed countries. The Pakistan Development Review, 41-51.
- Sun, Q., Tong, W., &Yu, Q. (2002). Determinants of foreign direct investment across China. Journal of international money and finance, 21(1), 79-113.
- Ghosh Roy, A., & Van den Berg, H. F. (2006). Foreign direct investment and economic growth: a time-series approach. Global Economy Journal, 6(1).
- Hassan, M. U., Hassan, M. S., & Mahmood, H. (2013). An Empirical Inquisition of the Impact of Exchange Rate and Economic Growth on Export Performance of Pakistan. Middle-East Journal of Scientific Research, 14(2), 288-299.
- Khrawish, H. A., & Siam, W. Z. (2010). Determinants of direct foreign investment: Evidence from Jordan. BEH-Business and economic horizons, 1(1), 67-75.
- Maddala, G.S., & Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and statistics, 61(S1), 631-652.
- Omankhanlen, A. E. (2011). The effect of exchange rate and inflation on foreign direct investment and its relationship with economic growth in Nigeria. EA1, 1.
- Ball, L., & Romer, D. (1990). Real rigidities and the non-neutrality of money. The Review of Economic Studies, 57(2), 183-203.
- Salike, N. (2010). Investigation of the "China effect" on crowding out of Japanese FDI: An industry-level analysis (1990-2004). China Economic Review, 21(4), 582-597.
- Udoh, E., & Egwaikhide, F. O. (2008). Exchange rate volatility, inflation uncertainty and foreign direct investment in Nigeria. Botswana Journal of Economics, 5(7), 14-31.
- Ullah, S., Haider, S. Z., & Azim, P. (2012). Impact of exchange rate volatility on foreign direct investment: A case study of Pakistan. Pakistan Economicand Social Review, 50(2), 121.
- Uwubanmwen, A. E., & Ajao, M. G. (2012). The determinants and impacts of foreign direct investment in Nigeria. International Journal of Business and Management, 7(24), 67.
- Zaman, K., Khan, M. M., & Ahmad, M. (2012). RETRACTED: The relationship between foreign direct investment and pro-poor growth policies in Pakistan: The new interface. Economic Modelling, 29(4), 1220-1227.
Abstract Views: 74
PDF Views: 6