Effects of Economic Factors on Foreign Direct Investment Inflow: Evidence from Pakistan (1971-2005)

The objective of this research paper is to examine the effects of various economic factors on Foreign Direct Investment (FDI) inflow into Pakistan. For econometric analysis secondary data ranging from 1971 to 2005 have been used. Log linear regression model and the method of Least Square were used as an analytical tool for the empirical estimation. In addition, for time series data analysis Augmented Dickey Fuller test and Error Correction Model have also been used. This study found the market size (i.e., measured by gross domestic product), domestic investment, trade openness, and return on investment statistically significant with positive sign. Moreover, external debt and taxes have been found statistically significant with negative signs. To enhance desirable amount of FDI into Pakistan, the least square estimates suggests that the government make sure constant economic environment, provide a well-established infrastructure, encourage domestic investment, minimizing external debt burden, provide fiscal and financial incentives, and consistency in the government policy.