Economic Misery, Exchange Rate, Interest Rate, and Foreign Direct Investment: Empirical Evidence from Pakistan

Abstract

This study explores the relationship between economic misery, exchange rate, interest rate, and foreign direct investment in Pakistan spanning from 1972 to 2013. Utilizing time series data sourced from various issues of Pakistan's Economic Surveys, the State Bank of Pakistan, and the World Development Indicators, the study employs the Augmented Dickey-Fuller and Philips Perron unit root tests to assess the stationarity of the variables. Co-integration among the variables is examined using the Autoregressive Distributed Lag approach. The empirical findings indicate a negative and statistically insignificant impact of economic misery and political instability on foreign direct investment in Pakistan. Conversely, the exchange rate is found to have a positive and significant relationship with foreign direct investment over the analyzed period. Despite the importance of exports in the economy, the study reveals a negative and insignificant impact of exports on foreign direct investment. Interest rate and GDP emerge as significant determinants of foreign direct investment in Pakistan, displaying a positive and significant relationship with FDI. These results suggest that lower interest rates and higher GDP levels are associated with increased foreign direct investment flows into the country. Overall, the study provides insights into the factors influencing foreign direct investment in Pakistan. The positive impact of exchange rates, interest rates, and GDP on FDI underscores the importance of macroeconomic stability and conducive investment conditions in attracting foreign investment. However, the findings also suggest that addressing economic challenges such as political instability and export dynamics is crucial for enhancing Pakistan's attractiveness as a destination for foreign direct investment.