Asian Journal of Economics, Finance and Management

2(3): 1-13, 2020; Article no.AJEFM.216

Impact of Foreign Direct Investment on Economic

Growth of Pakistan
Sarwat Sohail1* and Saima Shahzad Mirza2
1
Department of Business Administration, Virtual University, Lahore, Pakistan.
2
Department of Energy System Engineering, University of Agriculture, Pakistan.

Authors’ contributions

This work was carried out in collaboration between both authors. Author SS designed the study, wrote
the first draft, managed the literature review and wrote the results and discussion, while author SSM
helped in statistical analysis. Both authors read and approved the final manuscript.

Received 07 April 2020

Accepted 13 June 2020
Original Research Article
Published 20 June 2020

ABSTRACT

Impact of foreign direct investment on economic growth of Pakistan has been discussed in this
paper. This paper used the data for the time period 1996 to 2015 and statistical techniques, i.e.,
correlation matrix and regression analysis have been used to see the effect of independent
variable (FDI, exports, domestic capital, index of human capital and No. of terrorist attacks) on the
dependent variable GDP. The result shows that there is a significant relationship between foreign
direct investment and gross domestic product of the country. Other independent variables like
exports, domestic capital, Index of human capital and No. of terrorist attacks also affects the
economic development of the country. Expanded exports, more domestic capital and good human
capital support the economic growth and government should try to eradicate terrorism for attracting
more foreign investment.

Keywords: Exports; domestic capital; no. of terrorist attacks; FDI; GDP; index of human capital;
Pakistan.

JEL Classification: O10, O19.

1. INTRODUCTION investor can be an individual, a company or a

Government body. Foreign investment proves to
The foreign direct investment is very important be an important driver of economic development
for the economic development of developed and in developing countries [1]. It provides many
under developing countries. Foreign direct benefits to developing countries such as it brings
investment refers to the inflows of certain amount foreign capital and funds, technical skills as well
from one country to another country. This as technology which help them in boosting their
investment is different from an investment made economy [2]. In many ways economy of
on the purchase of shares. A foreign direct countries are affected by FDI, GDP rate,
_____________________________________________________________________________________________________

*Corresponding author: Email: ss.sarwatsohail@gmail.com;

 Sohail and Mirza; AJEFM, 2(3): 1-13, 2020; Article no.AJEFM.216

exchange rate and Government policies, but the buying power that accelerates the economic
rate of GDP is mostly affected by foreign development of the country.
investment. When foreign investment comes in a
country, it means business flourishes in that International free trade increases the export of
country by producing more goods and services local products in international market, thus the
which rises the GDP level of that country [3]. FDI production of local industries increases on a
is not only fruitful for poor countries, but also for large scale which shows a significant impact on
developed countries, the main reason for the economic development of Pakistan [12].
investing in developing countries is profit. Many studies have been done to see the positive
impact of economic growth and FDIs such as
In case of Pakistan, although the country blessed [13] but some studies show that the impact of
with natural resources, but unluckily inflows of economic growth and FDIs are negative such as
FDI are very low due to terrorism and political [14].
instability [4]. According to Economic survey in
fiscal year 2017-18 per capita income of the  Rationale of study
country increased, but not as per target and most
of the population lives below the poverty line. The objective of this study is to identify the
The purpose of macroeconomic policy makers to impact of foreign direct investment on economic
formulate the policies to reduce the effect of growth in Pakistan over the period of 1996 to
inflation in the country and to attract foreign 2015 and to determine how the economy of
funds in the country which help in reducing the Pakistan has been affected by foreign direct
poverty [5]. Developing countries are interested investment during that period.
and tried to attract foreign investment [6]. Since
its independence in 1947, Pakistan tried to  Statement of Problem
attract foreign investment by introducing changes
in trade policies such as modifications in trade How foreign direct investment has affected the
policies, concessions in direct and indirect taxes, economic growth of Pakistan?
tariff reduction and credit facilities for investors.
Currency exchange rate and more incentives and 1.1 Background
protection for investors proved to be a plus point,
but the political condition of the country can’t be To increase the rate of capital formation high
ignored, which always effects the inflows of FDI level of saving and investment is required, but
because the new ruling party brought novel this is not possible in developing countries,
changes in policies [7]. domestic saving always remains below the
desired level because of low per capita income
Foreign direct investment not only provides [15]. To fill this gap between saving and
financing, but also delivers many benefits to the investment FDI is a crucial tool that can increase
country, e.g. transfer of technology, human foreign capital inflows. Government of Pakistan
capital, the creation of a good business tries to develop liberal policies to overcome trade
environment and development of international barriers and encourage investors for
trade. The inflows of foreign investment from investments. In Pakistan, the history of FDI
developing countries are a reason of transfer of showed that from 1976 to 1981 foreign investors
advanced technology from developed countries started their investment in Pakistan, but after that
to Pakistan [8]. This transfer of technology it has been declining till 1987. In early 1990s,
compels the local firm to adopt modern Government of Pakistan started economic
technologies that maximizes the production by restructuring to develop business activities and
using scarce resources [9]. Adaptation of attract investors [16] because of this foreign
innovative technology creates a good business investment increased from 1988 -1997 but after
environment in the sense of promoting that due to Pakistan nuclear test and Kargil war
competition among enterprises which also boosts with India it did not maintain its momentum and
the economy of the country. FDI has a significant went down in 1998-2001. Then again FDI in
effect on human capital and can attach the more Pakistan slightly went down after the incident of
inflow of FDI [10]. FDIs also influence the job 9/11 in 2001 due to supporting the war against
market when new businesses come into Pakistan terrorism till 2004. The momentum of foreign
it creates more job opportunities for unemployed investment inflows raised from 2008 till now 2017
people [11]. They paid high wages and except few years.
empowered them to enhance their living
standard. Increase in income leads to more

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1.2 Research Objectives different variables and how the GDP of Pakistan
is affected by the terrorist attack.
 To analyses that does economic growth in
Pakistan depends upon FDI. The best way to attain economic growth is FDI
 To explore the trend of FDI in last two [19]. According to some researchers FDI is only
decades. fuel for the economic upswing in developing
 To identify GDP has an association with countries [20]. Different studies have been done
FDI. to support the relationship between the FDI and
 Recommendations for Government for economic growth which are as under:
attracting more FDI in Pakistan.
[21] studied the panel data in a group of 70
1.3 Research Questions developing and developed countries from 1998-
2002 by using Generalized Method of Moments
to identify the impact of FDI on financial
 Does the FDI affect the GDP of the
development and economic growth. They
country?
concluded that in developing countries the effect
 What is the relationship between GDP and
of FDI on economic growth is negative and
FDI?
significant. The result of the study supported the
notion that low level of development of financial
1.4 Significance of this Study sectors in developing countries and weak rules
and regulations that leads towards
Since independence in 1947, Pakistan has misappropriate distribution of private capital
attracted much investment in the country; by badly affect the economic performance of the
formulating liberal policies that will attract more country.
investors and will give a proper chance to local
investors to participate in the development of the [22] investigated the effect of FDI on import and
country’s economy. This study creates export of Pakistan by using the technique of co-
awareness among the reader about the integration and error correction the study was
importance of FDI in the economic development conducted considering the period from 1973-
of Pakistan. This study will show FDI’s 2002. The result showed that in short and long
consequence on economy of Pakistan during run influence of FDI on import is positive and FDI
1996-2015. Pakistan faces a lot of issues like has a negative effect on export in the short run
nuclear test, Kargil war with India, war on but in long run export positively affected by FDI.
terrorism and political instability during that
period which has affected its economy badly and [23] studied the effect of foreign capital inflows
brought a fiscal crisis in the country. The aim of on economic growth in Pakistan. The study was
this study to see that how FDI and economic conducted by considering the period from 1981-
growth of Pakistan is affected due to these 2010 by using the technique of multiple
issues. regression analysis on variables FDI, GDP,
remittance and external debt. The study showed
2. LITERATURE REVIEW that the economic growth of the country is
positively affected by these variables.
Foreign direct investment is defined as “An
increase in the book value of the net worth of The effect of FDI on GDP of Pakistan, studied by
investment of one country held by the investor of [14] during the period from 1980 to 2006 using
another country where the investments are under the technique of least square method, the study
the managerial control of the investor" [17]. From showed that the GDP of the country is not
last 20 years in the entire world the total volume affected by FDI.
of FDI has been increased [18] in which the
South Asian, East Asian and Southeast Asian [24] studied the impact of FDI on economic
countries are the main destination for growth of Pakistan by using the technique of
investments. To verify the relationship of FDI and autoregressive distributed lag error correction
economic growth lot of studies have been done model. Variables used for this study were GDP
which show that relationship of FDI and per capital, FDI, gross capital formation,
economic growth either positive, negative or no population, inflation and trade. The study
significant relationship between them. The covered the data from 1966-2014 and concluded
purpose of this study is to identify the impact of that in the long and short run there is positive
FDI on economic growth of Pakistan by using relationship between FDI and economic growth

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of the country. [13] Studied the effect of FDI and goods and services which ultimately raise the
trade openness on economic growth in Pakistan. price of good and services. [27] studied the
The study was conducted by considering the impact of FDI and consumer price index on
period from 2008 to 2013. The result showed that economic growth of the SAARC member of a
trade openness, domestic capital and FDI have a nation, the data belongs to the years 2001-2010.
positive impact on economic growth. The conclusion of the study was that economic
growth and FDI of countries has a positive
The relationship of foreign remittance, FDI, association while it showed that FDI and the
imports and economic growth were investigated consumer price index has negative relationship.
by [25]. The study conducted by considering the This result was concluded by using multiple
period of 1977 to 2013 by using the time series regression analysis.
econometric technique and it revealed that
foreign remittance and FDI positively affect the 2.1 Theoretical Framework
economy.
The objective of this paper is to study the impact
The relationship of FDI and GDP in Pakistan is of FDI on economic growth of Pakistan, where
studied by [26] where GDP is used as dependent economic growth is dependent variable and
variable and labor force, domestic capital and foreign capital, terrorist attack, domestic capital,
FDI are used as independent variables and the human capital and export are independent
result showed that in the long run and in the variables. These variables have already been
short run the link between FDI and GDP is studied in different researches in the context of
positive. Government tries to attract more FDI for Pakistan, but contribution of this study is the
the economic progress of the country. selection of that specific time period which
affected the Pakistani economy in different ways
FDI creates more jobs which increase the like nuclear test war with neighbor countries and
income of people, because of more income economic slump after 9/11. The relationship
consumption expenditure rises. More between dependent and independent variables is
consumption expenditure leads towards more shown as under:

Fig. 1. Relationship between dependent and independent variables

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 Foreign Capital Pakistan during 1996 to 2015. This index is

based on year of schooling and return to
The capital that inflows in a country because of education. This variable is used in the study of
foreign direct investment is called a foreign [28]. The reason of the selection of this variable
capital. It is vital and substantial variable for is for economic development, FDI plays an
economic development of the country. Foreign important role and we only bring foreign
capital proves to be helpful in boosting the investment in our country if we have skilled,
economy of that country. Foreign direct knowledgeable and technically expert human
investment is basically a collection of equity capital. Technically educated and export workers
capital, reinvestment of earnings and other can work more efficiently as compared to less
capitals. Data were taken from the World Bank, educated workers and increase the GDP by
which was in US dollars. During the period of accelerating the production process.
1996 to 2015 the minimum value of FDI for
Pakistan was 0.31 billion US dollar in 2000 and  Exports
maximum value was 5.59 billion US dollar in
2007. Goods and services produced domestically and
purchased by foreigners are called export. Export
 Domestic Capital includes freight, insurance, travel, merchandise,
license fee, royalties and lots of services like
Gross capital formation is comprised of addition Government services, banking, financial,
in fixed assets within country and net change in communication, and constructions, personal.
inventories. The fixed assets are in the form of Export data in this study are presented in billion
new machine, equipment, infrastructure, US dollars. FDI helps in production of more
construction of schools, railway, commercial standardized, export quality and goods and
buildings, hospitals etc. This variable is used by services in the country Export increases the
[13] in his research paper the reason behind the foreign reserves; more goods and services are
selection of this variable in my study used to see exported rest of the world will result in rising the
whether the country has its own reserves which it foreign reserves which promote the economic
can use for growth. More domestic capital means growth of the country. In this study the data
less reliance on foreign debt, if a country has a regarding the export of the country have been
foreign debt its means that country losses its collected from the site of the global economy
money and decreases the economic growth. FDI from 1996 to 2015. During that time period the
boost up the economic growth of the country minimum value of export was 9.67 billion US
which ultimately increases the domestic capital. dollars in 1999 while maximum value was 30.7
This variable will show that during 1996-2015 billion US dollars in 2013.
how much domestic capital Pakistan have and
how it affected the economic growth of Pakistan.  Terrorism
In 1999 domestic capital has a minimum value of
9.8 billion US dollars in 1999 and reached at $ Terrorism affects the political, social and
42.5 in 2015. This study is intended to economic situation of the entire world. War
investigate the contribution of domestic capital in against terrorism in Pakistan is also burning
economic development from 1996-2015 and data issue which seriously affected the Pakistani
are collected from trading economic in billion US economy. Literacy, unemployment, unequal
dollars. distribution of wealth and poverty is some of the
reasons of terrorism in Pakistan. "Total Terrorist
 Human Capital attacks" is used as a proxy for measuring the
terrorism in Pakistan for the time period of 1996
Human capital is considered as an important to 2015 similar to the other study by [29].
asset for the development of an economy, Peaceful condition of law and order in the
without efficient and competent workforce an country is one of the basic reasons for attracting
economy can’t develop. Human capital is a foreign investment. Terrorist attacks during that
measure of skills, education, capacity and specific period of study (1996 to 2015) has
attribute of the work force which influence their meaningful impact on FDI and economic growth.
productivity and earning potential. In this For calculating the “Total Terrorist Attacks” sum
research, human capital index per person is used up all types of attacks like bombing, car bombing,
as human capital to show the effect of this suicides attack, kidnapping etc. in a year. Data is
variable in the economic development of collected from Global terrorism database.

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 Economic Growth terrorism and political instability during that

period which has affected its economy badly and
Another important variable of this study is brought a fiscal crisis in the country. The
economic growth. Economic growth shows the collected data will be analyzed and statistically
ability of countries to produce more goods and expressed in tables and graphs.
services. Economically developed countries can
improve its economic, political and living 3.1 Research Paradigm
standard of its people. The same variable is used
In this research deductive approach is used
by [29] in his study. For the measurement of because this approach emphasizes the data
economic growth during 1996 -2015 GDP per
collection and this research has quantitative
capita is used as a proxy. GDP is gross domestic
data. The other reasons to adopt this approach
product, which are produced within a country in a
are that in this research hypothesis are
year. For calculating the GDP per capital divides
developed and statistical technique is used for
the annual production of goods and services in a testing these hypotheses and relationship of this
country by population. In this study economic
approach with positivistic paradigm and depend
growth is used as the dependent variable. The upon statistical facts.
data are collected from the site of the global
economy and data is in billion US dollars. 3.2 Nature of Research Study
2.2 Proposed Hypotheses In this research explanatory research approach
is used which show the impact of FDI on
H1= There is a significant relationship between economic growth of Pakistan. The reason behind
FDI and economic growth. the selection of this approach is it shows cause
and effect relationship between variables. In this
H01= There is no significant relationship
research, economic growth is dependent variable
between FDI and economic growth.
and export, domestic capital, human capital,
H2= There is a significant relationship between terrorist attack, foreign capital are independent
domestic capital and economic growth. variables. This type of research approach will
show the effect of independent variables on the
H02= There is no significant relationship dependent variable.
between domestic capital and economic growth.
3.3 Data Collection Sources
H3= There is a significant relationship between
For this research data will be collected from
export and economic growth.
secondary source. The secondary sources of
H03= There is no significant relationship data are the World Bank, trading economic and
between export and economic growth. global terrorism database.

H4= There is a significant relationship between 3.4 Data Collection Tools

human capital and economic growth.
For data analysis the statistical tool which I will
H04= There is no significant relationship use for this study is SPSS.
between human capital and economic growth.
3.5 Subjects
H5= There is a significant relationship between
In this study secondary data is used regarding
terrorist attack and economic growth.
FDI, GDP per capita, domestic capital, exports,
H05 = There is no significant relationship human capital, terrorist attacks and non-
between terrorist attack and economic growth. probability sampling technique is used.

3. RESEARCH METHOD 3.6 Data Processing, Analysis Technique

& Interpretation
Type of research in the current study is
quantitative because I have collected numerical For processing and analysis purpose, data are
data of variable during the period from 1996 to collected from the websites of the World Bank,
2015. This study has selected this time frame site of the global economy, human development
because Pakistan faces a lot of issues like Index of Pakistan, terrorism database and trading
nuclear test, Kargil war with India, war on economies. This data is secondary source data

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that is available on web sites. For data TA = Terrorist Attack

processing SPSS software is used and analysis = Error
techniques which are used in this research i.e.
Regression and correlation. The purpose of Gross Domestic Product: GDP is the most
using these techniques first regression analysis important measure of the economy’s output. If
shows the relationship between dependent and the GDP is increasing it shows that production,
independent variables and correlation analysis employment, exports is going up and balance of
show the level of association between dependent payment is positive, increasing in FDI, domestic
and independent variables. capital. GDP of Pakistan shows that there is an
increasing trend in GDP from 1996 to 2015 with
Regression Equation: little bit fluctuations. The highest value of GDP is
$270.556 billion in 2015 and the lowest value in
Economic growth = + 1FC + 2DC + 3HC + recorded in 1998 which is $ 62.19 billion.
4E + 5TA +
Total Exports: Exports shows that there are
Where: more economic activities in the country which
accelerate the GDP of the country. The total
= constant exports of Pakistan are continuously increasing
= co efficient of independent variable from 1996 to 2015. Graph 2 shows that export of
Economic Growth = dependent variable Pakistan is rapidly increasing in 2011 which is $
FC = Foreign Capital 2.83 billion as compared to previous years. The
DC = Domestic capital highest value of exports is at $ 30.7 billion in
HC = Human capital 2013 but the lowest value is at $ 9.67 billion in
EX = Export 1999.

GDP of Pakistan in Billion $

300

200

100

0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

GDP Billion $

Graph 1. Gross domestic product

Exports Billion $
40
30
20
10
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

Export Billion $

Graph 2. Total exports

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Table 1. Data of dependent and independent variables

Years Dependent Independent variables

variable
GDP Exports FDI Domestic capital Index of human No. of terrorist
Billion $ Billion $ Billion $ Billion $ capital per person attacks
1996 63.32 10.7 0.92 12.03 1.46927 6
1997 62.43 10.4 0.72 11.19 1.48909 2
1998 62.19 10.25 0.51 11.01 1.50916 6
1999 62.97 9.67 0.53 9.8 1.52951 2
2000 73.95 9.94 0.31 12.74 1.55013 2
2001 72.31 10.6 0.38 12.29 1.60251 2
2002 72.30 11.01 0.83 11.99 1.65667 14
2003 83.24 13.92 0.53 13.95 1.71179 8
2004 97.97 15.35 1.12 16.24 1.75520 19
2005 109.502 17.18 2.2 20.89 1.79972 11
2006 137.264 19.4 4.27 26.54 1.79762 30
2007 152.386 20.14 5.59 28.63 1.79551 34
2008 170.078 21.06 5.44 32.66 1.79341 40
2009 168.153 20.84 2.34 29.51 1.79130 50
2010 177.407 23.98 2.02 28.04 1.78920 148
2011 213.587 29.83 1.33 30.16 1.78712 64
2012 224.382 27.82 0.86 33.83 1.78505 206
2013 231.219 30.7 1.33 34.58 1.78299 77
2014 244.361 29.92 1.87 35.76 1.78093 18
2015 270.556 28.69 1.62 42.4 1.78090 25
In this paper data has been collected from the site World Bank, the global economy, human development Index
of Pakistan, terrorism database and trading economies. In this paper scaling variable used is billion $

FDI Billion $
6

0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

FDI Billion $

Graph 3. Foreign direct investment

Foreign Direct Investment: Foreign investment Domestic Capital: Domestic capital is the main
is a crucial indicator for the economic source of sustainable economic growth.
development of the host country. It allows the Domestic capital of Pakistan was at its
more capital inflow in the country and creates peak in 2015 with the amount of $42.4 billion and
more opportunities in the country. Foreign was its lowest point in 1999 amounting $9.8
investment in Pakistan shows an upward trend in billion.
2004 and goes down in 2012. Again in 2013
foreign investment shows an upward trend, but Index of Human Capital per Person: Educated,
again in 2015 it goes down. The highest value of trained and skillful workforce can increase the
foreign direct investment in 2007 which is $ 5.44 productivity and can be the reason of economic
billion and the lowest in 2000 which is $ 0.31 growth. According to FRED economic data
billion. Human Capital per Person Index of Pakistan was

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at its lowest value 1.46 in 1996 which increased country’s economy. Terrorism also increases the
continuously till 2005 and remained stable till government spendings and reduces the foreign
2015. investments consequently GDP of the country
goes down. According to statistics of terrorism
Number of Terrorist Attacks: Terrorism has a data base incidents of terrorism escalated from
negative effect on the development of the 2006 to 2013.

Domestic Capital Billion $

50
40
30
20
10
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Domestic Capital Billion $

Graph 4. Domestic capital

Index of Human Capital/ Person

2

1.5

0.5

0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

Index of Human Capital per person

Graph 5. Index of human capital

No. of Terrorist Attacks

300
200
100
0
1996
1997
1998
1999
200
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

No. of Terrorist Attack

Graph 6. No. of terrorist attacks

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4. RESULTS AND DISCUSSION relationship between exports and GDP. Similarly

the p values of FDI and domestic capital are also
Correlation matrix measures how strongly the 0.000 which is less than significant level 0.05 and
variables are related to each other. In this study it reject the null hypothesis and prove that there
the correlation matrix shows that exports is is a positive and significant relationship between
correlated to GDP and likewise other GDP, domestic capital and FDI. But the p value
independent variables domestic capital, index of of index of human capital 0.12 is more than
human capital and No. of terrorist attacks are significant level 0.05 and it accepts the null
correlated with GDP which is our dependent hypothesis that there is no significant relationship
variable. Only one independent variable FDI is between GDP and index of human capital.
not showing any association with dependent Similarly, No. of terrorist attacks in not significant
variable GDP in this matrix. because its p value 0.5 is greater than the
significance level 0.05. Standardized beta show
Correlation coefficient measures the relationship that how much dependent variable would be
between two variables in term of strength and changed by changing one unit in the
direction. Correlation coefficient shows that how independent variable. Exports shows positive
much change in the value of one variable can correlation so change in one unit of exports bring
change the value of another variable. In our 37% increase in GDP similarly FDI has a positive
study significant level is 0.05 and significant relationship with GDP, so change in one unit of
levels of coefficient is assured by using the t- FDI brings 13.5% change in economy same goes
test. In our study p value of exports is 0.000 with domestic capital that change in one unit with
which is less than the significance level 0.05 so it independent variable will increase the overall
reject the null hypothesis of our study that there economy by 74%, but index of human capital and
is no significant relationship between exports of No. of terrorist attacks have negatively affected
economic growth (GDP) and accept the H1 the economy and decrease the overall economy
hypothesis that there is a positive and significant by 55% and 15% respectively.

Table 2. Correlation matrix

GDP Exports FDI Domestic Index of human Terrorist

capital capital attacks
GDP 1
Exports .980** 1
FDI 0.325 0.323 1
Domestic capital .976** .947** .501* 1
** ** ** **
Index of human capital .755 .790 .571 .807 1
No. of terrorist attacks .571** .607** 0.086 .537* .486* 1
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed)

Table 3. Correlation coefficient

Model Unstandardized Standardized t P

coefficients coefficients
B Std. error Beta
1 (Constant) 25.114 28.541 .880 .394
Exports 3.398 .654 .372 5.197 .000
FDI 6.028 1.218 .135 4.948 .000
Domestic Capital 5.013 .475 .744 10.559 .000
Index of Human Capital -31.413 19.489 -.055 -1.612 .129
No. of Terrorist Attacks -.021 .030 -.015 -.693 .500
a. Dependent Variable: GDP

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Table 4. Model summary

Model R R square Adjusted R square Std. Error of the estimate R square change
a
1 .998 .996 .994 5.33528 .996
Predictors: (Constant), Exports, FDI, Terrorist Attacks,
Index of Human Capital per Person, Domestic Capital

4.1 Regression Analysis on the progressing economy, it slows down the

economic activities and reduce the GDP.
Model summary of regression analysis shows
that the dependency of the dependent variable In the correlation analysis, independent variables
on independent variables. The value of R exports, FDI and domestic capital show
Square determines the strength and weakness significant and positive relationship with GDP,
of the relationship of dependent and independent but index of human capital and terrorist attacks
variables. If the value of R Square is less have a negative relationship with GDP it shows
than 50% it shows the weak relationship, if the that when No. of terrorist attacks increase
value is more than 50% it shows that there is a obviously economic activities goes down and
strong relationship between dependent consequently GDP of the country goes down.
variable and independent variables. In our Index of human capital shows that with respect to
study the value of R square is 99%, which economic growth how much human capital is lost
proves that there is perfect strong relationship by the country. Coefficient of determination of R
between dependent variable GDP and square shows that 99% variation in the
independent variables (exports, FDI, domestic dependent variable which is GDP is explained by
capital, index of human capital and no. of terrorist all independent variables FDI, exports, domestic
attacks). The coefficient of determination of R capital, index of human capital and No. of
square shows that independent variable the terrorist attacks. The regression analysis also
variation of 99% is explained by its predictors proves that the relationship is perfectly strong
variables which are FDI, domestic capital, index between dependent and all independent
of human capital, No. of terrorist attacks, and variables which also support our hypothesis and
exports. reject the null hypothesis.

5. CONCLUSION 6. FURTHER RECOMMENDATIONS

The role of FDI in shaping the economy of the The result of the study not only show the impact
country is very obvious. This paper shows the of variables on GDP, but also provides new
impact of FDI on the economic growth of the direction for current and potential prospective
Pakistan from 1996-2015. In the literature review investors for foreign investment, but also gives
most of the studies show that there is positive new direction to policy makers to make policies
and significant relationship between FDI and according to the situation faced by Pakistan.
economic growth of the country. In this paper, it Potential investors can analysis the economic
is also revealed that there is positive relationship situation and Government policies for further
of FDI on economic growth of the country, but it investment. Exports, human capital and
is also shown that not only FDI but other domestic capital are all increasing during 1996-
variables is also important for the economic 2015 which is a good sign for foreign investors to
growth of the country. For economic growth, invest in the country. The increasing trend in
exports of the country are also noteworthy, exports shows more economic activities and
exports show an increasing trend during selected human capital shows that human resources
time period 1996- 2015 which shows that exports are at full utilization and will give maximum
also participate in accelerating the economic output.
activities of the country. Domestic capital is also
important factor and shows that it boost the Pakistan faces a tough situation in term of
economy of the country. Proper and maximum terrorist attacks from 2006 to 2014, but after that
utilization of human capital boosts the economy government devise policies and overcome this
of the country. Graph 5 shows the index of problem which will attract foreign investment.
human capital and it demonstrates that it Peace and harmony in society are also important
continuously increases from 196 to 2015. The for attracting foreign investment. Now
number of terrorist attacks has an inverse effect terrorist activities are under control in Pakistan

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 Sohail and Mirza; AJEFM, 2(3): 1-13, 2020; Article no.AJEFM.216

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