Macroeconomic Determinants of Foreign Direct Investment in Pakistan: Evidence from Economic Growth, Inflation, Exchange Rate, Interest Rate, and Corruption (1995-2025)
Abstract
Foreign Direct Investment is considered as the most imperative and essential source of generating capital not only in developing countries but also in under developed nations. Developing economies have a shortage of capital consequently they are competing with other economies to fascinate greater FDI inflow as possible. FDI have a vigorous character in infrastructure, efficiency and high-tech enhancement. Besides this, FDI is beneficial for both host and established economies since the marginal productivity of investment in developing nation is more because of its less investment and overseas investors pursue high profits and attract towards the developing nations. The intention of this investigation is to analytically examine an association among FDI and growth rate in Pakistan and other key economic factors such as exchange proportion, interest proportion, corruption and inflation from 1995-2025 by using Bound test ARDL (Augmented Regressive Distributive Lag) model. The econometric result of the analysis shows that interest rate, inflation and corruption have negative relation to foreign direct investment in both short and long run. While GDP and exchange rate have positive relation in long and short run, ECT (-1) (-0.4728) shows the model will converge to equilibrium by the rate of 47%. R-squared shows 87% total variation in endogenous variable due exogenous variables. Diagnostic Test illustrate there is not autocorrelation, heteroscadacity problem in the model and model in stable with in the critical region. Analysis suggested that Government should take measure in directive to alleviate the exchange frequency that may be attracting more investor for sake of higher profit. Developed FDI arrivals in turn fetch more educate effort and substitute absolute technology.
KEYWORDS:
ARDL Bound Test, Exchange Rate, Gross Domestic Product, Interest Rate, Inflation Corruption foreign direct investment.
