Determinants of Foreign Direct Investment Flows to Pakistan

This paper investigates the determinants of foreign direct investment (FDI) flows in dynamic econometric model on Pakistan economy data set (1970-2007). VAR, VEC, generalized impulse response functions, Granger causality, forecasting, three stage least square econometric techniques are used in empirical analysis. Results suggest cost related, macroeconomic factors and cumulative risk index variables are the major determinants emerged in short-run analysis. The results also suggest long run relationships among FDI, openness and macro economic factors consistently. Openness emerges as dominant factor in long run dynamics. Evidence suggests that determinant variables that exhibit short run dynamics may also exhibit long run dynamics and vice versa. The country requires to maintain macroeconomic stability and continuity in openness policies of reform processes of the last 20 years, along with maintaining cost advantage by controlling the level of prices, wage rate, cost of doing business and investment friendly environment. This implies continuity of sustained stable macro economic policies, improvement in country's risk profile followed by cost related and investment environment improving factors.