Contribution of Foreign Direct Investment in Economic Development of Pakistan: A Human Development Perspective

Abstract

The prime objective of the study is to scrutinize the contribution of foreign direct investment (FDI) in people-focused view of economic development in Pakistan over the period of 1972-2015. Realizing human centered view of economic development, this study uses human development index (HDI) as proxy of economic development along with real gross domestic product and inflation. Auto Regressive Distributed Lag (ARDL) bound testing technique is used to find out long run (LR) associations. Augmented Dickey-Fullers (ADF) test is applied to identify the unit root problem. Statistical soundness of the specified models and estimated coefficients is checked by residual diagnostic tests and stability diagnostic tests. Results of all specified models reveal robust long run relationship between dependent and explanatory variables, and adjustments of short deviations from equilibrium in the long- term. Sensitivity analysis confirms that initial results are robust. FDI has positive and significant impact on HDI with income and excluding income component. The results of this study highlight the prominence of FDI in order to improve level of development in Pakistan. The study proposes that government of Pakistan should has more FDI friendly policies in combination with growth augmenting and macroeconomic stability policies to achieve the dream task of human development as an explicit objective of economic development in Pakistan.