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The Impact of Institutional Quality on Sectoral Foreign Direct Investment in Pakistan: A Dynamic Simulated ARDL Approach

Author

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  • Zafar Ullah Khan

    (Department of Economics, Kohat University of Science & Technology, Kohat 26000, Pakistan)

  • Alam Khan

    (Department of Economics, Kohat University of Science & Technology, Kohat 26000, Pakistan)

  • Dilawar Khan

    (Department of Economics, Kohat University of Science & Technology, Kohat 26000, Pakistan)

  • Róbert Magda

    (Hungarian National Bank—Research Center, John von Neumann University, 6000 Kecskemét, Hungary
    Vanderbijlpark Campus, Northwest University, Vanderbijlpark 1900, South Africa)

Abstract

Capital is needed to accelerate the development process, but developing nations struggle with minimum resources. Since foreign direct investment (FDI) is essential to solve the funding shortage, developing nations make every effort to attract FDI to their countries. This study was conducted to explore the impact of institutional quality on sectoral FDI in Pakistan using time series data for the period from 1986 to 2019. To create a solid foundation for policy formulation, this study developed a single measure of institutional quality by utilizing a wide range of institutional indicators. It evaluates the impact of overall institution quality on sector-level FDI and examines the causal relationship between institutions and sectoral FDI with a clear focus on a single-country analysis. The dynamic simulated autoregressive distributed lag technique was employed to explore the impact of institutional quality and other factors on FDI. The results of the study explained that institutional quality and TO have a positive and significant effect on the FDI of the primary FDI sector at 5%, while in the case of the secondary sector, the effect of institutional quality, HDI and GDP on FDI inflow is significant at 10% and TO has a significant effect on secondary sector FDI at 5%. In addition, institutional quality and GDP have a positive relationship with tertiary sector FDI at 5%. The empirical findings show that higher institutional quality in emerging economies such as Pakistan encourages large transfers of technological advances through FDI, increasing the overall performance of the economy. This study found that institutional quality significantly increases sectoral FDI in Pakistan. Finally, this study prescribes some policy measures to increase FDI based on the findings.

Suggested Citation

  • Zafar Ullah Khan & Alam Khan & Dilawar Khan & Róbert Magda, 2023. "The Impact of Institutional Quality on Sectoral Foreign Direct Investment in Pakistan: A Dynamic Simulated ARDL Approach," Sustainability, MDPI, vol. 15(9), pages 1-16, April.
    • Handle: RePEc:gam:jsusta:v:15:y:2023:i:9:p:7231-:d:1133591
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