The Impact of Infrastructure on Foreign Direct Investment

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www.ccsenet.org/ijbm

International Journal of Business and Management

Vol. 6, No. 5; May 2011

The Impact of Infrastructure on Foreign Direct Investment: The Case of Pakistan Dr. Ch. Abdul Rehman Rector, Superior University, Lahore, Pakistan Muhammad Ilyas Lecturer, Department of Economics, Superior University Lahore, Pakistan Hassan Mobeen Alam (Assistant Professor) & Muhammad Akram (Corresponding author) Hailey College of Commerce, University of the Punjab Quaid-e-Azam Campus, Lahore, Pakistan E-mail: makram@hcc.pu.edu.pk Received: November 3, 2010 Abstract Purpose – The purpose of this study is to analyze the role of infrastructure for and in ascertaining captivations of foreign direct investment (FDI). This work aims to investigate the effects of host country's infrastructure availability along with exchange rate and market size on inflows of FDI towards Pakistan. Design/methodology/approach – This study employs autoregressive distributed lag (ARDL) approach to cointegration and an error correction model based on ARDL approach using time series data for the period 1975-2008 in case of Pakistan. Findings – This paper reveals a strong positive impact of infrastructure in attracting foreign direct investment, in short and in long run, in case of Pakistan. Practical implications – The findings can be used to help out government policy makers on FDI as well as are equally important for international financial lender/donor agencies and countries interested in rehabilitation activities of flood-affected areas with special reference to infrastructure and FDI while extending financing facilities to Pakistan. Originality/value – This study contributes in the following manner: first, it gives better impending and understanding for decision making about foreign direct investment in Pakistan. Second, it is the first effort that an exclusive study on FDI with special reference to infrastructure made in Pakistan. Third, it depicts the closer relationship between FDI attractiveness and infrastructure availability. Keywords: Infrastructure, Exchange rate, FDI, ARDL, Pakistan 1. Introduction The pivotal contribution of FDI in the economic progress has been well recognized in the literature. The outcomes of foreign direct investment are far important for developing countries as to developed countries as developing nations are mostly short of capital, lack of access to modern technology etc. FDI resolves these lacking along with providing benefits to foreign investor. The literature on FDI explores various determinants having the mutual benefit of investor as well as host nation. The process of liberalization in international trade in Pakistan was originated during early 1980. The market based economic reforms and policies gradually open the doors for foreign investor in Pakistan. The government provided various trade facilitation incentives like tax concessions, tariff reduction, credit facilities and also Accepted: December 7, 2010 doi:10.5539/ijbm.v6n5p268

268

ISSN 1833-3850

E-ISSN 1833-8119

www.ccsenet.org/ijbm

International Journal of Business and Management

Vol. 6, No. 5; May 2011

softened foreign exchange controls (Khan, 1999). In 1990s, the government also opened the agriculture, insurance, energy and telecommunications to FDI. These reforms uplifted the level of FDI to some extend but rapid growth cannot be attained due to political instability and inconsistency of policies. Moreover, the earthquake of 2005 and most importantly flood 2010 further reduces the charm of investment in Pakistan. In recent periods, the need and importance of addressing some priority determinant along with classical determinants has been recognized. Among huge literature on FDI, few researchers have well acknowledged the significant contribution of infrastructure along with other determinants to attract FDI inflows. Some of them are Kok and Ersoy (2009), Sekkat and Veganzones-Varoudakis (2004), Asiedu (2002), Morrisset...
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