INFLUENCE OF FOREIGN DIRECT INVESTMENT AND EXPORT ON ECONOMIC GROWTH IN PAKISTAN ECONOMY

1. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
1 | P a g e
INFLUENCE OF FOREIGN DIRECT INVESTMENT AND EXPORT ON
ECONOMIC GROWTH IN PAKISTAN ECONOMY
SIR TEHSEEN JAVAID
ATIF AHMED - 1228
SYED AHMED ALI – 0538
MUHAMMAD FARRUKH EJAZ – 0251
SHAKIR ULLAH - 0159
SALEEM ABBAS - 0243
The purpose of this paper is to examine that how much export and foreign direct
investment plays a significant role in the growth of economy of Pakistan. Data gathered
from 1970 to 2011.

2. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
2 | P a g e
ABSTRACT
In the study, we want to examine that whether there is any significant effect of export and
foreign direct investment on economy of Pakistan, so, we collect the data from 1970 – 2011 on
time series. Data was took from website of state bank of Pakistan and applied on e-views for
different test to verify that our statement is valid or not. Gross domestic product is taken as
dependent variable while export and foreign direct investment as independent variable. The
economic growth of any country plays a vital role in the progress of the country; there are
various factors and sectors on which it depends. The result shows that there is significant effect
of export and foreign direct investment on economy growth i.e. gross domestic product.
Suggestion after the examining the data and its result, the policy makers of Pakistan have to
focus more on the tools of fiscal and monetary policy to encourage the exporter. Therefore, the
percentage of export would be enhanced against economy of country and play more essential
role in the growth of the country as well as the balance of payment and balance of trade should
be in surplus or on breakeven point which help the country to make the term of trade better off.
While, on the other hand, using the channel of foreign direct investment, to entertain those
sectors, which are below the par such as agriculture, education and health sector.
Key Words: Gross Domestic Product - Foreign Direct Investment - Export – Pakistan

3. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
3 | P a g e
ACKNOWLEDGEMENT
We are deeply grateful to Almighty Allah for enabling us to accomplish this research project.
Our sincere thanks to our supervisor and advisor Sir Tehseen Javiad without his help and
guidance this study would not have been possible.
Further, the respondents are also equally thanked for their support in carrying out this research.
We are also thankful to those who guided us throughout the project.
Last but not the least; we would render great thanks to our Family and others who had directly
and indirectly cooperated with us throughout our research.

4. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
4 | P a g e
TABLE OF CONTENTS
1. INTRODUCTION.......................................................................................................................5
2. PURPOSE OF STUDY................................................................................................................6
3. LITERATURE REVIEW.............................................................................................................6
3.1 Review of Theoretical Literature ..............................................................................................6
3.2 Review of Recent Empirical Literature......................................................................................7
4. METHODOLOGY......................................................................................................................8
4.1 Modeling Framework...............................................................................................................8
4.2 Hypothesis of the Model ..........................................................................................................8
5. ESTIMATION AND RESULTS..................................................................................................8
5.1 Least Square Test....................................................................................................................8
5.2 Adjusted R-Square...................................................................................................................9
5.3 Multicollinearity Test...............................................................................................................9
5.4 Auto-Correlation Test............................................................................................................10
5.4.1 Durbin Watson ..................................................................................................................10
5.4.2 Series Correlation (Lm Test)...............................................................................................10
5.5 Heteroskedasticity .................................................................................................................10
5.6 Stability Analysis ..................................................................................................................11
6. CONCLUSION MARKS...........................................................................................................11
DATA SOURCES............................................................................................................................11
Appendix .........................................................................................................................................12

5. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
5 | P a g e
1. INTRODUCTION
Pakistan is a development country and enrich in the all-natural recourses. Due to the different
socioeconomic conditions, economic growth of Pakistan is declining or we can say that towards
downward slope due to many reasons. We have identified the impacts of some economics factors
like exports and foreign direct investment on the economic growth of Pakistan i.e. gross
domestic products. Gross domestic product is calculated as how much a country produces a
goods and services during a financial year within their physical boundary of a country. It is
usually, calculated by adding together several categories like consumption, investment and
government spending, net exports of goods and services.
From the past analysis and 1literature review is also indicating that exports put a positive impact
on the economic growth of the country. Government of Pakistan encourages expansion in
exports through various incentives such as, export subsidies, benefits in taxes, etc. The direction
of exports need to be diversified, the focus of exports on a few primary commodities makes
country highly at risk because if market prices change globally, it would affect badly. For
efficient utilization of available scarce resources is essential for expanding global trade volume.
Economists often assert that trade liberalization improves social welfare and alleviates poverty,
because it generate jobs opportunities, speedup economic growth and improves consumer choice
and living standard of the peoples of the societies.
Foreign direct investment is nowadays key factor for the developing country and helps them to
build their economy. Country likes Pakistan which is based on opened economy2, foreign direct
investment is considered as source of income which supports them to better off their balance of
trade and utilize their scare resources. But, it would be badly affected by energy crisis, poor law
& order situation, unsecure condition in the business activities due to terrorism, high prices of
fuel and gas and government negligence. Native person or foreigners like to earn profit or double
their money; they want a high profit and do not want to take a risk. Mostly, foreign investor
earned profits, transferred them to their countries, and did not transfer the latest technologies to
the host countries. As a result, foreign direct investment has less impact on the economic growth.
Foreign direct investment contributed not much in the growth of the country as relate to domestic
investment. Although, many researchers has proved that there is positive impact of foreign direct
investment on economy
Since Pakistan is also an important Asian nation, the question arises as to why it failed to achieve
rapid growth in the economy like the other Asian countries. It has been examined that in the
literature review that Pakistan actually failed to identify the importance of some variables in that
period, so, we have collected the data of last 41 years to analysis that is there any significant
effect of export and foreign direct investment on the growth of the economy of the Pakistan.
1 Literature (theoretical and empirical) is given in the chapter # 3 (Page # 6)
2 Opened economy is that economy where investment is accepted in the both form i.e. local and foreign
investment likeFDI

6. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
6 | P a g e
2. PURPOSE OF STUDY
The purpose of this study is to find out that whether there is any impact of export and foreign
direct investment on the economy of the Pakistan or not. For that purpose, we have taken the
data of 41 years and put the gross domestic product is taken as independent variable while export
and foreign direct investment as dependent variable.
3. LITERATURE REVIEW
3.1 Review of Theoretical Literature
The impact of export and foreign direct investment is going to be discussed in theoretical under
the light of various researchers. Adam Smith and Ricardo had discussed a lot about the factor
export; it creates a huge impact on the economy of any country. Due to export, an unutilized
resource are going to be utilized in the proper way and due to it, latest technologies and
development is made which not only help in earning of the foreign currencies but lift the
economy of the country. Alam in 2011, in his paper, he concluded as the direct relationship
between export and gross domestic product in the long run as well as in the short run. He took
the time series data on the quarterly basis from the period of 1971-2007. Helpman and Krugman
in 1985 said that, international trade (export) has positive impact on the economy of the country.
Because, trade has implicit impact on the country e.g. specialization and reallocation of resources
would be made, those sectors which has less comparative advantages would produces more
goods comparatively in their preceding periods, which would lead the economic growth of the
country. From the last decade, Pakistan is creating a strong impact in the trade sector (export).
Gross domestic product is considered of the consumption, investment, government expenditures
and export minus import. If the balance of trade is in favorable, the impact on the economy is
positive or vice versa. On the other hand, investment could be in the form of local saving or
foreign direct investment. Foreign direct investment has two impacts on the economy of the
country, one in the form of productivity of the country and other one has on the business activity.
EXPORT FDI
GDP

7. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
7 | P a g e
Shabbir, Mahmood and Niazi in 1992, in their paper said that, foreign direct investment plays an
essential role in building new facilities for the person (individual, associate of person and
corporate), profits and reinvestment is made by the overseas in the economy of their native land
that boost their gross domestic product. In the year of 1994, Nelson stated, “Please come and
invest in my country”. Fernando Henrique Cardoso in 1995 stated, “We need private capital”.
The foreign direct investment has attached with the many small and medium sectors. By
combining of all the sectors (education, stock exchange trading, small business like dairy farms
and others, government sectors and many others), it creates massive impact on the economy.
3.2 Review of Recent Empirical Literature
Miankhel, Thangavelu and Kalirajan had published the paper foreign direct investment and
exports on economic growth in May 2009 and topic was foreign direct investment and exports on
economic growth. Data was collected on time series and period was 1970 to 2005. Variables are
gross domestic product, export, import and foreign direct investment. Methodologies are unit
root tests and cointegration. Conclusion is that export and foreign direct investment have impact
on gross domestic product. Impact is not only in short run but in the long run too. Government
has to develop effective policy to promote greater exports and foreign direct investment inflows
into the domestic economy. The recommendation is that gross domestic product is not a common
factor in the short run but in the long run to, so, the government has to make the strong policy.
Export and foreign direct investment is the key components which and have a direct relation with
the gross domestic product.
Ahmadi and Ghanbarzadeh had published the paper i.e. effect of foreign direct investment and
exports on economic growth in 2011. Period for collecting the data was taken from 1970 to 2008.
Variables are gross domestic product, real consumption, real domestic investment, foreign direct
investment, export, import, interest rate and exchange rate of foreign currency in term of the
domestic currency. Methodologies used unit root tests and granger causality tests. Conclusion is
that there is a positive effect and direct relation between foreign direct investment and exports on
gross domestic product i.e. on economic growth of the country. The recommendation is given in
this paper is that for enhancing the economy of the country there should be more expenditure on
the both foreign direct investment and exports because they both have direct relation with
economic growth.
Rehman and Atif collected the data from 1985 to 2009 of time series and published the paper
foreign direct investment and exports on economic growth in 2008, 09. Variables are chosen as
gross domestic product, export, import, foreign direct investment and error. They have used the
following methodologies; unit root tests, least squares, ARDL test for lag estimation, WALD test
and diagnostic tests. Conclusion of this research is that the impact of foreign direct investment on
economic growth of Pakistan is less or not statistically significant. This shows that on average
foreign direct investment has been not a problem in Pakistan during long run period under study.
Trade is also made a significant effect on the economy. Recommendation is that Pakistan should

8. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
8 | P a g e
take some measures to enhance the levels of foreign direct investment directly or to private
sector to improve its economic growth rate, which also suggests that Pakistan should focus on
export-led growth.
4. METHODOLOGY
4.1 Modeling Framework
For the examination of the impact of the export and foreign direct investment on the economy
growth of the Pakistan, we have work on secondary data that is taken from the Statement Bank
of Pakistan of 41 years (1970-2011). Model of the study is as follows:
GDP = c + β1 (FDI) + β2 (EXT)
Where,
GDP = Gross Domestic Product or economy growth
FDI = Foreign Direct Investment
EXT = Export
C = Constant i.e. all those other factors which has impact on GDP
β1, β2 = Coefficients
Gross domestic product is dependent variable while export and foreign direct investment as
independent variable.
4.2 Hypothesis of the Model
The hypothesis of the model is as follows:
HO: Significant impact of export and foreign direct investment on gross domestic product
HA: Insignificant impact of export and foreign direct investment on gross domestic product
5. ESTIMATION AND RESULTS
5.1 Least Square Test
We have applied our data on the least square test because we want to examine that whether our
statement is valid or not i.e., there is significant impact of export and foreign direct investment
on economy growth of the Pakistan. The confident interval our data is 99% i.e. chances of error
is 1%.
Table # 1: Least Square Test3
Variable Coefficient t-Statistic Prob.
3 Appendix – 5.1 Least Square Test

9. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
9 | P a g e
C 1.96E+09 1.079479 0.2870
EXPORT 6.567059 27.88775 0.0000
FDI 2.183081 1.719254 0.0935
F-statistic 956.3072 Prob. Value 0.3805
From the above table, we conclude that Prob. Value is 0.3805. Therefore, our alternative
hypothesis that is, is there any significant impact of export and foreign direct investment on gross
domestic product is valid.
The value of the coefficient means that if one unit of independent variable (constant, export and
foreign direct investment) is increased than the dependent variable (gross domestic product) is
increased by beta value times i.e. 1.96E+09, 6.567059 and 2.183081 respectively, other things
remaining constant. It could be express:
GDP = 1.96E+09 + 6.567059*Export + 2.183081*FDI
5.2 Adjusted R-Square
Table # 2: Adjustment R-Square4
Adjusted R-squared 0.978992
The R-square indicate that how much percentage of dependent variable explain the independent
variable. In our case, dependent variables are export and foreign direct investment and
independent variable is economy of the country. The value of Adjusted R-square is 97% that
means our data is near to the mean value. If the value is not according to our standard then we
have either to increase our data values or change the pattern of collecting the data.
5.3 Multicollinearity Test
Multicollinearity test is conducted to specify that whether our independent variables do have any
correlation between them or not. The result shows that there is no multicollinearity between our
independent variable (export and foreign direct investment) because the value of the Centered
VIF is below 10.
If, there is any correlation between the independent variables then beta values becomes invalid.
For analyzing the data, we have conducted the variance inflation factor test. If, the value of the
test is below ten, it means that there is no correlation between our independent variables. The
best measure against the multicollinearity is to increase the sample size or use LOG function.
Table # 3: Multicollinearity Test5
VIF TEST
Variable Centered VIF
CONSTANT NA
4 Appendix – 5.1 Least Square Test
5 Appendix – 5.3 Multicollinearity Test

10. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
10 | P a g e
EXPORT 2.244621
FDI 2.244621
5.4 Auto-Correlation Test
Autocorrelation indicate the trend of error. It compares the current period with precede period
and show that whether the error is consistent or not. If, the error is consistent then it is not
acceptable. Therefore, we have conducted the Durbin Watson test.
5.4.1 Durbin Watson
Value of the Durbin Watson is between 0-2 then it shows that there is positive trend and if the
value of between is 2-4 then there is negative trend but if the value is exact 2, which means that
there is no autocorrelation.
Table # 4.1: Autocorrelation Test6
Durbin-Watson stat 0.385987
In our case, value of the Durbin Watson is 0.385987 that indicate that there is a positive trend of
error. Now, we test our data on LM Test, the purpose of that test is to check that auto-correlation
is several or not.
5.4.2 Series Correlation (Lm Test)
LM Test is conducted to know whether autocorrelation is several or not. The value of Prob. F is
greater than 0.1, which means that we accepted HO.
Table # 4.2: Autocorrelation Test7
Breusch-Godfrey Serial Correlation LM Test:
F-statistic 97.65804
Prob. F(1,38) 0.196200
HO: No auto-correlation exists in the data
HA: Auto-correlation exists in the data
5.5 Heteroskedasticity
Table # 5: Heteroskedasticity Test8
Heteroskedasticity Test: White
F-statistic 16.61588
6 Appendix – 5.1 Least Square Test
7 Appendix – 5.4 Autocorrelation
8 5.5 Heteroskedasticity

11. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
11 | P a g e
Prob. F(5,36) 0.374100
5.6 Stability Analysis
We conducted the stability test to check that whether our data is stable or not. Blue line i.e.
model is within our Red lines i.e. limitation.
Table # 6: Stability Test
6. CONCLUSION MARKS WITH RECOMMENDATIONS
Conclusion of the entire test is that there is a significant impact of export and foreign direct
investment on the economy of Pakistan. Confident interval is considered as 99% and data is
stable as well as valid. No, trend of error found while autocorrelation is not several although the
test is positive and shows the autocorrelation in the data. To enhance the economy of Pakistan,
foreign direct investment and export plays a vital role and generate the more income or revenue
as compare the other factors. Pakistan is a developing country and depends on its agriculture
sector for export as well as on cotton and other sectors too. Policy makers have to make such
type of policy that shall be fruitful for the exporters and provide them a platform to enter into the
western market and create the opportunity for them. While on the other hand, foreign direct
investment has direct impact on the reduction of the energy crises, unemployment, business
opportunity that are associated with the economics growth of Pakistan.
DATA SOURCES
Ahmadi, R.,& Ghanbarzadeh, M. (2011). FDI, exports and economic growth: Evidence from Mena
Region. Middle-East Journal of Scientific Research,10(2),174-182.
Hsiao, F. S., & Hsiao, M. C. W. (2006). FDI, exports, and GDP in East and Southeast Asia—Paneldata
versus time-series causality analyses. Journal of Asian Economics,17(6),1082-1106.
-20
-15
-10
-5
0
5
10
15
20
1975 1980 1985 1990 1995 2000 2005 2010
CUSUM 5% Significance

12. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
12 | P a g e
Kalirajan, K., Miankhel, A. K., & Thangavelu, S. M. (2009). Foreign direct investment, exports, and
economic growth in selected emerging countries: Multivariate VAR analysis. Exports, and Economic
Growth in Selected Emerging Countries:Multivariate VAR Analysis(December20,2009).
Agrawal, S., Raghuwanshi, S., & Pradhan, R. (2014). Influence of leading indicators on national
economy. International Journal of Research in Economics and Social Sciences,4(3),1-14.
Helpman, E., & Krugman, P. R. (1985). Market structure and foreign trade: Increasing returns, imperfect
competition, and the international economy. MIT press.
Shabbir, T., Mahmood, A.,& Niazi, S. A. (1992). The Effects of Foreign Private Investment on
Economic Growth in Pakistan [with Comments]. The Pakistan Development Review,831-841.
Shan, J.,& Sun, F. (1998). On the export-led growth hypothesis: the econometric evidence from
China. Applied Economics,30(8),1055-1065.
Appendix
5.1 LEAST SQUARE TESTS
Dependent Variable: GDP
Method: Least Squares
Date: 04/28/15 Time: 11:04
Sample: 1970 2011
Included observations: 42
Variable Coefficient Std. Error t-Statistic Prob.
C 1.96E+09 1.81E+09 1.079479 0.287000
EXPORT 6.567059 0.235482 27.88775 0.000000
FDI 2.183081 1.269784 1.719254 0.093500
====================================================================
====
R-squared 0.980017 Mean dependent var 5.91E+10
Adjusted R-squared 0.978992 S.D. dependent var 5.08E+10
S.E. of regression 7.36E+09 Akaike info criterion 48.34557
Sum squared resid 2.11E+21 Schwarz criterion 48.46969
Log likelihood -1012.257 Hannan-Quinn criter. 48.39106
F-statistic 956.3072 Durbin-Watson stat 0.385987
Prob(F-statistic) 0.000000

13. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
13 | P a g e
5.3 MULTICOLLINEARITY TEST
Variance Inflation Factors
Variance Inflation Factors
Date: 04/28/15 Time: 11:04
Sample: 1970 2011
Included observations: 42
Variable
Coefficient
Variance
Uncentered VIF Centered VIF
C 3.29E+18 2.553179 NA
EXPORT 0.055452 5.306109 2.244621
FDI 1.612352 2.997820 2.244621
5.4 AUTOCORRELATION
Series Correlation LM Test
Breusch-Godfrey Serial Correlation LM Test:
F-statistic 97.65804 Prob. F(1,38) 0.196200
Obs*R-squared 30.23512 Prob. Chi-Square(1) 0.0000000
Test Equation:
Dependent Variable: RESID
Method: Least Squares
Date: 04/28/15 Time: 11:05
Sample: 1970 2011
Included observations: 42
Presample missing value lagged residuals set to zero.
Variable Coefficient Std. Error t-Statistic Prob.
C 5.62E+08 9.75E+08 0.576105 0.567900
EXPORT -0.251275 0.128795 -1.950964 0.058500
FDI 2.290425 0.719201 3.184681 0.002900
RESID(-1) 0.921243 0.093222 9.882208 0.000000
==================================================================
======
R-squared 0.719884 Mean dependent var 8.90E-06
Adjusted R-squared 0.697769 S.D. dependent var 7.18E+09
S.E. of regression 3.95E+09 Akaike info criterion 47.12063
Sum squared resid 5.92E+20 Schwarz criterion 47.28613
Log likelihood -985.5333 Hannan-Quinn criter. 47.18129
F-statistic 32.55268 Durbin-Watson stat 1.792043
Prob(F-statistic) 0.000000

14. IMPACT OF EXPORT AND FOREIGN DIRECT INVESTMENT ON GROSS DOMESTIC PRODUCTS
14 | P a g e
5.5 HETEROSKEDASTICITY
Heteroskedasticity Test: White
F-statistic 16.61588 Prob. F(5,36) 0.37410
Obs*R-squared 29.30259 Prob. Chi-Square(5) 0.00000
Scaled explained
SS 19.26330 Prob. Chi-Square(5) 0.00170
Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 04/28/15 Time: 11:10
Sample: 1970 2011
Included observations: 42
Variable Coefficient Std. Error t-Statistic Prob.
C -3.05E+18 1.37E+19 -0.223041 0.82480
EXPORT^2 -0.748288 0.251111 -2.979905 0.00510
EXPORT*FDI 15.71214 4.443621 3.535886 0.00110
EXPORT 1.23E+10 5.41E+09 2.273438 0.02910
FDI^2 -30.62992 6.007432 -5.098670 0.00000
FDI -1.30E+11 7.71E+10 -1.684841 0.10070
================================================================
========================
R-squared 0.697681 Mean dependent var 5.03E+19
Adjusted R-squared 0.655692 S.D. dependent var 6.29E+19
S.E. of regression 3.69E+19 Akaike info criterion 93.07887
Sum squared resid 4.90E+40 Schwarz criterion 93.32711
Log likelihood -1948.656 Hannan-Quinn criter. 93.16986
F-statistic 16.61588 Durbin-Watson stat 2.029912
Prob(F-statistic) 0.000000
5.6 STABILITY ANALYSIS
-20
-15
-10
-5
0
5
10
15
20
1975 1980 1985 1990 1995 2000 2005 2010
CUSUM 5% Significance