Foreign direct investment and its impact on Pakistan economy.

• Author: Shaikh, Nazir Ahmed

Byline: Nazir Ahmed Shaikh

Economic growth is the aspect to a nation's progress and prosperity. Foreign direct investment (FDI) is generally considered as a key driver of global economic integration. Investment provides base to the economic development to the developing countries. Standard economic theory points to a direct, causal relationship between economic growth and FDI that can run in either direction.

On the one hand, FDI flows can be induced by host country economic growth if the host country offers a sizeable consumer market, in which case FDI serves as a substitute for commodity trade or if growth leads to greater economies of scale and cost efficiency in the host country. On the other hand, FDI itself may contribute to host country economic growth, by augmenting the country's capital stock, introducing complementary inputs, inducing technology transfer and skill acquisition, or increasing competition in the local industry. Of course, FDI may also inhibit competition and thus hamper growth, especially if the host country government affords extra protection to foreign investors in the process of attracting their capital.

Foreign direct investment as growth accelerating component has received a great attention in developed countries even in developing countries during recent years. It has a matter of great concern for economists how FDI effects economic growth of the host countries economy. In closed economy there is no access to foreign investments and savings this type of economy is solely based on domestic savings and investment resources either from domestic savings and domestic resources. But in open economy the investment comes from both sources either from domestic savings or foreign capital inflows like FDI. The FDI enables the host country to achieve investment level beyond its capacity to improve GDP and economic growth.

In Pakistan the saving rate is very low as compared to other developing countries. The most important factor affecting saving rate is foreign capital inflow. Because the major portion of the foreign capital inflow to Pakistan was utilized in consumption purpose so the inflow of foreign capital into Pakistan's economy has reduced the saving rate in private and public sector. The saving rate can be increased by liberating the foreign trade and payment sector. Because of shortage of capital in the developing countries, there is need of capital for their development process, and the marginal productivity of capital is higher in these countries. Mostly investors in the developed countries seek high returns for their capital. Hence there is a common benefit in the international movement of capital.

Liberalization of the...