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Foreign Capital and Investment in Pakistan: A Cointegration and Causality Analysis

  • Sharafat, Ali
  • Hamid, Waqas
  • Muhammad, Asghar
  • Raheel Abbas, Kalroo
  • Muhammad, Ayaz
  • Mukhtyar, Khan

Present study is focused to examine the effects of foreign capital flows on domestic investment in Pakistan economy for the period of 1972-2013. Time series econometric techniques like unit root test, Johansen cointegration and Granger causality methods have been used for the data analysis. Long run cointegration relationship has been found between domestic investment and foreign capital flow variables. Unidirectional causality running from external debt stock, remittances and domestic saving to domestic investment has been found. The causality between external debt servicing and investment is bidirectional. Bidirectional causality is also observed between foreign direct investment and domestic investment but causality between investment and inflation is confirmed in neither direction. The results are statistically robust and the estimated model is stable. The study suggests some policy recommendations.

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File URL: http://mpra.ub.uni-muenchen.de/55640/1/MPRA_paper_55640.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 55640.

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Date of creation: 2013
Date of revision: 28 Apr 2013
Publication status: Published in Journal of Basic and Applied Scientific Research 4.4(2014): pp. 217-226
Handle: RePEc:pra:mprapa:55640
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  4. Paul R. Krugman, 1988. "Financing vs. Forgiving a Debt Overhang," NBER Working Papers 2486, National Bureau of Economic Research, Inc.
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  9. Mohammad Afzal, 2007. "Savings and investment in developing countries : Granger causality test," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 44(2), pages 99-110, December.
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  13. Laurent Gheeraert & Ritha Sukadi Mata & Daniel Traca, 2010. "Remittances and Domestic Investment in Developing Countries: An Analysis of the Role of Financial Sector Development," Working Papers CEB 10-013.RS, ULB -- Universite Libre de Bruxelles.
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  20. Ali, Sharafat, 2013. "The Small and Medium Enterprises and Poverty in Pakistan: An Empirical Analysis," MPRA Paper 50506, University Library of Munich, Germany, revised Jul 2113.
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