Economicdeterminantsofdomesticinvestmentacaseofpakistan: Economic Determinants of Domestic Investment: A Case of Pakistan
Economicdeterminantsofdomesticinvestmentacaseofpakistan: Economic Determinants of Domestic Investment: A Case of Pakistan
EconomicDeterminantsofDomesticInvestmentACaseofPakistan
© 2014. Amer Sohail, Umer Rehman & Muhammad Azeem. This is a research/review paper, distributed under the terms of the
Creative Commons Attribution-Noncommercial 3.0 Unported License http://creativecommons.org/licenses/by-nc/3.0/), permitting
all non-commercial use, distribution, and reproduction in any medium, provided the original work is properly cited.
Economic Determinants of Domestic
Investment: A Case of Pakistan
Amer Sohail α, Umer Rehman σ & Muhammad Azeem ρ
Abstract- The study intends to investigate the determinants of of capital formation and demolishing financial markets.
gross domestic investments in Pakistan from the period of Policy makers and scholars are in rush to identify, what
1973 to 2010. All the annual time series of data have been are the factors that are important in determining
extracted from the valid sources like; Business Recorder and investment process. The study intends to investigate
State Bank of Pakistan. In order to assess their behavior over
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what are the determinants of domestic investment in
the time, and to evaluate how these variables have either
hindered or encouraged the growth of investment in Pakistan’s Pakistan. Because, Pakistan’s economy is suffering for
Year
economy. Domestic investment in Pakistan is stimulated by lack of indigenous resources, which are relevant for
real GDP growth as well as with the expansion of exports of surge in economic progress of a country. The study
goods and services. Moreover, the flow of FDI in Pakistan is contributes to the existing literature in the following 41
“crowd in” domestic investment. The development of financial ways: first, in most of the existing studies FDI has been
sector and human capital is vital for economic escalation in
Global Journal of Management and Business Research ( B ) Volume XIV Issue VII Version I
considered as major predictor of economic growth
country. However, the stimulation in formal credit and whereas less emphasis has been given to domestic
formation of industrial capital may lead towards promulgation investments. So, this study bridges this gap by
in domestic investments. The Pakistan’s economic
exclusively considering the role of domestic investments
environment demands massive level of domestic investments
which lead towards capital formation and economic in economic growth. Secondly, most of the empirical
progression. studies have been carried out on the direct relationship
Keywords: domestic investment, foreign direct between domestic investment and its determinants in
investment and economic growth. developing countries but remained inconclusive.
Because, the scholars have focused on the impact of
I. Introduction determinants like; short and long run respectively.
D
However, in this study OLS regression has been used,
omestic investment is a tool for measuring the
the technique will not only identify the direction of the
level GDP. It is an important component of GDP
relationship but will also measure the magnitude of the
which is used for future productivity of an
relationship. Finally, this research has been conducted
economy. It includes both replacement purchases plus
following the recent economic reform efforts in Pakistan
net additions to capital assets and investments in
like; involving the economic liberalization for both
inventories. The gross domestic investment includes
domestic and foreign investment, financial
three types of investments like; non-residential
developments, leveraged industrial policies and most
investment, residential investments and change in
importantly after the massive social-economic changes
inventories. In Pakistan, the trend of capital formation
in region.
through these three means is negligible therefore there
is harsh need to investigate what are the basic II. Literature Review
determinants of gross domestic investments in Pakistan. In the last 40 years, we were checking the
Recently, the empirical evidence suggests that the relationship between saving and foreign capital flow. In
fastest growing countries are the biggest FDI-host this research, our aim is to identify the role foreign
countries and resultantly the domestic level of capital as substitute or complementary. There is the
investment creep up (Fabry & Zeghni, 2002). The massive debate on empirical and theoretical levels. The
attention has been changed from FDI to domestic dependency ratio also affects the foreign capital inflows
investment which is the real leader of economic growth and saving rate. This is a very interesting topic and more
after the financial crisis in Asian countries. Whereas, few attractive for study in developing countries (Khan,1992).
researchers have questioned that how did domestic Having focus on factors that affect savings in Pakistan.
investment increase in some developing countries and In this article, they conclude that bad effect of foreign
did not in others, in particular, what causes domestic capital on national saving in Pakistan. In 1970’s,
investment and what retards it. So, it is an important declining period was started for Pakistan but saving was
issue to address for a country like; Pakistan that is increasing in South East Asian countries (Hussein,
characterized by high unemployment, poverty rates, lack 1995). The trend of private saving compared with the
private saving of south East Asian countries by using co
Author α σ ρ: Department of Management Sciences University of integration techniques probed by different studies
Sargodha Gujranwala Campus. e-mail: Azeem_pugc41@yahoo.com Some other factors also influenced the long run
© 2014 Global Journals Inc. (US)
Economic Determinants of Domestic Investment: A Case of Pakistan
evolution of saving like; wealth, public sector debt and to the economy has been debated extensively over the
so on (Khan,H, 1997). The attitude of developing years. These debates help out of developed and under
countries toward foreign direct investment has emerged, developed economies. So, the most relevant material is
but the sentiment is weaker for Pakistan. Policies are put in this research of domestic investment which are
very weak in Pakistan for inflow of foreign direct reducing the spread of poverty in our economy.
investment. Private investment playing a crucial role in
many developing countries especially in Pakistan. As,
III. Methodology
Khan & Khan, (2001) analyzed the determinants of The data has been derives from SBP and
private investment with the help of ARDL technique. business recorder of Pakistan for the period of 1973-
They probed the relationship between long and short 2010. The regression and correlation techniques have
run investment that exist in Pakistan’s environment. been applied to conclude the results. In this line of
Foreign capital inflows are substitute or complementary research, in most of the studies a subset of the following
the researchers have proved that. In Pakistan the impact variables ( among others ) as the exogenous variables
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of FDI have long run impact on investments (Ahmed & in the domestic investment equation: FDI, exports and
Ahmed, 2002) . The contribution of domestic investment money supply.
Year
The details of the variables have given in table should be examined. The descriptive statistics have
no 01 along with proxies and sources of date from been presented in table no 02 which show that most of
where the date set has been extracted. the variables have normal standard deviations which
indicate that there is less variation in time series of data.
IV. Results The coefficients of skewness and kurtosis also indicate
In this section the results of the study have been that all the time series are normal and appropriate for
presented in different tables. It is a co-relational study; in regression analysis.
order to go for regression analysis the properties of data
Table No : 02 Descriptive Statistics
Export as a FDI as a GDI as a GDS as a Imports as a M2 as a
%age of %age of %age of %age of %age of %age of
GDP GDP GDP GDP GDP GDP
Mean 0.539421 0.021439 18.19572 11.11167 0.896660 0.419954
Median 0.550478 0.019499 18.31845 10.54257 0.755789 0.406806
The properties of data further analyzed by using correlations like; exports to GDP, imports to GDP and
pair-wise correlation analysis, its results have been M2. Moreover, this much of correlation between the
shown in table no 02. The coefficients of correlation above said variables can be justified because these are
between predictors clearly indicate that there is not any the macro economic variables which have collective
-
serious problem of multi-coliniarity and auto-correlation movements in response to external shocks. Overall, the
inresponse variables. However, few variables have data is appropriate for regression analysis.
shown the concerns for multi-coloniarity and auto
Table No : 03 Correlation Analyses
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FDI as %GDP 1
Exports as %GDP 0.4873 1
Year
GDS as % GDP 0.2704 0.4308 1
Imports as %GDP 0.3713 0.4053 0.4661 1 43
Global Journal of Management and Business Research ( B ) Volume XIV Issue VII Version I
M2 as %GDP 0.4340 0.6621 0.3235 0.5285 1
In order to investigate the relationship between in country. It has been probed that as the foreign funds
the variables, regression analysis has been applied, and will move in, the level of domestic investments will also
its results are reported in table no 04. Balance of trade, creep up. There are the two approaches to address this
money supply and gross domestic savings are the phenomena, the formal one narrates that as the MNC’S
important determinants of domestic investments. The (Multi-national Corporations) will flourish in country the
results of the study indicate that there are the positive auxiliary industries will also charge in with the local
and significant relationships between gross funding. However, the later one suggests that the
domestic investments with respect to foreign direct confidence of local investor boot up as he finds the
investment, gross domestic savings and money supply international investors in country.
economy. Domestic investment in Pakistan is stimulated integration Analysis. In: S. Strom (ed.),
by real GDP growth as well as expansion of exports of Econometrics and Economic Theory in the 20th
goods and services, domestic savings and foreign Century: The Ragnar Frisch Centennial Symposium,
direct investments. Moreover, the flow of FDI to Pakistan 1999, Ch. 11. Cambridge University Cambridge.
is “crowd in” domestic investment but with the more
magnitudes than GDP growth and exports expansion.
The development of financial sector and human capital
is vital for economic escalation in country. However, the
stimulation in formal credit and formation of industrial
capital may lead towards promulgation in domestic
investments. The Pakistan’s economic environment
demands massive level of domestic investments. As for
as the concern of economic determinants, the study has
2014