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Impact of Foreign Direct Investment on Trade and Economic Growth of Pakistan: A Co-integration Analysis

The aim of this study is to the long run relationship among Foreign Direct Investment, Trade (Imports & Exports) and Economic growth for Pakistan. The co-integrating VAR framework is used to find the relationship over the period of 1965 to 2005. The results show that there are two long run relationships exist between GDP, Imports and Exports and FDI. First long run relationship shows that both imports and exports affect GDP but FDI has insignificant effect on GDP. In second long run relationship shows that both imports and exports affect FDI but GDP is not significantly affecting FDI. It means that FDI and GDP have no effect on the each other in long run. Ganger causality test shows that FDI does not cause the GDP, but GDP cause FDI but GDP cause FDI. Exports and FDI does not ganger cause each other in the short run. The insignificant effect of FDI on GDP suggests us to check the nature of relationship between FDI and Domestic investment. The results show that FDI has no effect on domestic investment.