A Time Series Econometric Model of the Determinants of the Level of Inward Foreign Direct Investment into Pakistan

The flow of foreign direct investment (FDI) into developing economies has become more important at least since the 1980s, but these inflows are volatile and often dominated by a few very large, sometimes reversible transactions. A more appropriate measure of the importance of FDI in a developing economy is to examine the stock of accumulated FDI flows. This paper investigates both the economic and socio-political determinants of the level of FDI in Pakistan over the period 1973 to 2004, using a cointegration time series methodology. We find that the level of GDP is the primary determinant of FDI in Pakistan in the long run, although changes in the degree of political risk is also a significant determinant of new inflows of FDI in the short run.