The Determinants of Private Investment and the Relationship between Public and Private Investment in Pakistan

This paper analyzes the factors that play an important role in determining private investment in Pakistan using annual data for the period 1970-2006. The econometric tests undertaken support the view that private sector output, net capital inflows to the private sector, total sources of funds and past capital stock have all been significant determinants of private investment rates, while changes in the volume of bank credit also has a positive effect. The empirical evidence suggests that if the sector is squeezed for credit then there will be a reduction in the level of private investment with adverse impacts on the long-term productive capacity of the private sector. The results suggest that overall relationship of public and private investment is one of substitutability. It means there is a “crowding out” effect indicating that most of the physical and financial resources are utilized by public sector, thereby exerts a negative influence on private investment.