Role of Foreign Direct Investment and Remittances in the Economic Growth of Pakistan

Fatima Shahid, Sarfraz Hassan, Khuda Bakhsh and Nazia Tabasam

Abstract

Foreign direct investment and remittances play an important role in 
the economic growth of a country by bringing the latest technology, promising better infrastructure, providing foreign capital and generating employment  opportunities. The policy environment, macro-economic stability, a sound  domestic financial system, good law and order conditions and the availability  of cheap energy and skilled manpower are all assumed to be some of the  important pre-conditions for foreign direct investment. Remittances, being a  reliable alternate source of capital, serve the country well in distressed economic situations. The present study is designed to explore the role of  foreign direct investment and remittances on the economic growth of Pakistan  by using the Engle Granger Cointegration method. Empirical results suggest that there is a long run relationship between the dependent and independent  variables included in the model. Remittances and gross fixed capital  formation variables have a positive impact on economic growth in the long run. However, foreign direct investment has a negative effect on the growth  because pre-requisites are missing in Pakistan. Result suggests that there is 
disequilibrium among the variables in the short-run. The disequilibrium that  occurs in the previous time period is very rapidly adjusted in the current time  period. Improving conditions for attracting foreign direct investment could  further increase economic growth in the country.