The Determinants of Foreign Investment in Pakistan: a Gravity Model Analysis

Background: During the last two decades Pakistan was one of th e most attractive countries that received Foreign Direct Investment (FDI) among developing economies, and especially in first half of the last d ecade the growth was so rapid and sustainable in different industries as well as in agriculture. In Pakistani economy the role of Foreign Direct Investment is very important. Policies are clear ab out the foreign investment even then adjustments ar e made according to the time, objective, needs and economic circumstances i n the country. Methods: The present study aims to investigate the determin ants of foreign investment in Pakistan by using Gra vity model. By using panel data of FDI which is used as dependent variable and Gross domestic product, Gross domestic product per capita, Gross domestic product growth rate, Inflati on rate, Trade, Total government expenditure, Popul ation growth and Distance used as independent variable from 1999 to 2009 for empirical consequences, the study encompasses the examination of Foreign Direct Investment inflows fr om different countries and their geographical dista nce from Pakistan. Results: Two type of test is used (1) fixed and (2) random effect to check the relationship among foreign dir ect investment and independent variables. In our both models dista nce shows a negative impact on the decision to make an investment by investing partner while GDP and GDP growth have a positive and significant impact. Gravity in this reg ards does not effect that much for foreign direct investment attraction because results are negatively significant in this case that shows higher distance is a hurdle for the inflow of foreign inve stment but rest of the variables are significantly positive and related to the inflow of foreign investment except population growth which is negatively correlated. Conclusion: This research concludes that there is a strong evi dence of existence of gravity between Pakistan and its investing partners. It is also conclude that those countries have less distance from Pakistan, having more inves tment in Pakistan, therefore, attracting these countries for investmen t in Pakistan would cause a greater chance of econo mic growth in Pakistan.