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Foreign direct investment, growth and local financial markets: new evidence from Pakistan

Samia Nasreen and Sofia Anwar ()

International Journal of Economics and Business Research, 2014, vol. 7, issue 3, 336-348

Abstract: The objective of the present study is to examine the role of local financial markets in describing the relationship between foreign direct investment (FDI) and economic growth in Pakistan. For this purpose, the study uses annual data for the period 1973-2011. Empirical analysis is based on Johansen and Juselius cointegration technique and Toda-Yamamoto causality analysis. Empirical results suggest that FDI can play a contributing role in promoting economic growth in Pakistan. However, the full benefit of FDI is reaped only if local financial markets achieve a certain minimum level of development both in the long-run and short-run. Developed financial markets allow efficient allocation of resources and enhance the absorptive capacity of a country to FDI inflows.

Keywords: FDI inflows; financial sector development; economic growth; trade openness; black market premium; cointegration; Pakistan; foreign direct investment; local markets; financial markets. (search for similar items in EconPapers)
Date: 2014
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Handle: RePEc:ids:ijecbr:v:7:y:2014:i:3:p:336-348