Impact of Fdi on Economic Growth in Pakistan (1971-2007)

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Chapter 1
1. Introduction
Foreign direct investment (FDI) has been recognized as an important resource for economic development. Many people argue that the flows of FDI could fill the gap between desired investments and domestically mobilized saving. In recent decades under the changing modes of international transactions and cross-border mobilization of production factors, foreign direct investment (FDI) attracted great attention not only in developing countries but also in developed countries. The open FDI regime forced the host countries to adopt greater deregulation policies and reliance on market forces in their economies. Most developing countries such as Pakistan now considered FDI as the major external source of funding to meet obligations of resources gap and economic growth, however it is difficult to measure economic effects with precision. Nevertheless, various empirical studies showed a significant role of inward FDI in economic growth of the developing countries, through its contribution in human resources, capital formation, enhancing of organizational and managerial skills, and transfer of technology, promoting exports and imports and the network effect of marketing. The other positive spillover effect was that the presence of foreign firm helps expand infrastructure facilities, which makes it easier and profitable for local firms to crowd-in. Many factors made Pakistan an attractive place for foreign investments. Firstly, the Pakistanis economy showed responsiveness and potential capacity to meet exogenous shocks and minimize risks in response to various major regional and global events, for in Afghanistan. 9/11, 2001 which placed Pakistan in the frontline again and aid from Washington began to flow once again. The subsequent events included: Afghanistan war; the attack on India’s Parliament (2001) that led to mobilization of Indian troops, the 2003 war in Iraq, Karachi Stock Exchange (KSE) crisis and severe earthquake (2005).attacks on Bombay have also effect the policies of Pakistan as well as world’s developed nations. Thus, foreign investors were assured that they could carry out business in a stable and certain environment. Secondly, Pakistan has a population of more than 150 million (IFS, 2005) which provides a large market for consumer goods, a growing middle class with adequate purchasing power, and provision of low-cost labor, which reduces the cost of production and its strategic geographical location in Central and South East Asia. Thirdly, Pakistan has a world-class physical infrastructure, which was necessary for investment. The country inherited strong institutions from the British, and provided adequate communication infrastructure for foreign investors. Finally, there was also a strategic consideration for increasing FDI in Pakistan having implications for global security (yousaf et al 2008). FDI is also harm the social culture and social values of individual life. FDI is more than an external resource inflow during the military government. FDI also increase the productivity of labor and enhance the capacity of production. Now these days India, china and Eastern Europe is more recipient of FDI. Mostly foreign direct investment is come through global machines (MNC,s). But situation of Pakistan is opposite. There is no FDI but foreign aid for Pakistan. Overall benefits of FDI are greater than its social cost. We can define in different ways such FDI can modernize industry and better integrate the economy into international production. Market-seeking FDI is possible in present global recession. Export-oriented FDI is a desirable medium term objective. FDI accelerate the whole economy in better way. Over the last couple of decades FDI has remained the largest form of capital flow in the developing countries far surpassing portfolio equity investment, private loans, and official assistance. In 1997,FDI accounted for 45 percent of net foreign resource flows to developing countries, compared...
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