The Impact of Domestic Interest Rates on Foreign Direct Investment: Evidence from Pakistan

Abstract

This research delves into the influence of domestic interest rates on foreign direct investment within the context of Pakistan. The primary objective is to gauge the effect of various factors, including domestic interest rates, gross domestic product per capita, merchandise exports, and unemployment rates, on the inflow of foreign direct investment. Top of Form

For estimation purposes, this study utilizes various econometric techniques, namely the Augmented Dickey Fuller test and the autoregressive distributed lag model. Additionally, a series of diagnostic tests have been employed on secondary data spanning from 1972 to 2013, sourced from the economic survey database of Pakistan and the World Bank. The empirical analysis conducted in this study illuminates compelling insights into the dynamics of foreign direct investment in Pakistan. Notably, the results underscore a robust and positive relationship between domestic interest rates, GDP per capita, and unemployment rates with FDI inflows. This suggests that higher domestic interest rates, a more prosperous GDP per capita, and lower unemployment rates serve as catalysts for attracting foreign investment into Pakistan's economy. The study advocates for a balanced approach by policymakers to optimize the benefits derived from foreign direct investment in Pakistan. It emphasizes the importance of regulating interest rates at a level that not only attracts foreign investors but also ensures the preservation of the interests of domestic investors. Striking this delicate balance is crucial for fostering an environment conducive to sustainable economic growth and maximizing the positive impacts of FDI on the domestic economy.