Institutional-Macroeconomic Nexus: Inducement on Foreign Direct Investment (FDI) in Pakistan

Ahsen Mukhtar (), Muhammad Asif, Ghamz-e-Ali Siyal and Khalid Zaman ()
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Ahsen Mukhtar: COMSATS Institute of Information and Technology, Abbottabad, Pakistan

International Journal of Economics and Empirical Research (IJEER), 2014, vol. 2, issue 11, 465-479

Abstract: On global perspective, it is observed that developing economies need a boost up to grow faster to overcome from poverty trap. This trap can be overcome by investment on large scales which results into augmenting productive capacity of an economy, increases the level of employment and promotes technical progress through embodiment of new techniques. However, institutional variables on the other hand play a vital role to attract investment. This study main objective was to analyze the role of relationship of foreign direct investment on macroeconomic and institutional variables. This study used data from 1973-2010. econometric tools such as, unit root test, johansen cointegration, Granger causality and Error correction model. Along with that this study used diagnostic tests to check the model authenticity. The study found that there exist a short run relationship among inflation (INF), Law and Order conditions (LWO) and Taxation (T) have a significant impact on foreign direct investment (FDI). Institutional variables like Political Instability, Law n Order & Corruption are major institutional hazards in diminishing foreign direct investment (FDI). For every economy it is necessary to have strong institutions which attract investments. Hence, institutional variables play a vital role to have sound economic indicators like inflation, taxation and interest rate. These robust economic indicators encourage foreign direct investment in the country. The paper presents new insights for policy makers to develop Pakistan’s economy.

Keywords: Institutions; Macroeconomic; Pakistan (search for similar items in EconPapers)
JEL-codes: E1 (search for similar items in EconPapers)
Date: 2014
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