Foreign Direct Investment Essay

1764 words - 7 pages

Introduction:
Foreign Direct Investment, or FDI, is a type of investment that involves the injection of foreign funds into an enterprise that operates in a different country of origin from the investor” (economy watch). The determinants of foreign direct investment may be the socio-economic, financial and the cultural factors which usually have positive and negative effect on the foreign direct investment. The risk is attached to the determinants of foreign direct investment. This paper examines the major determinants of foreign direct investment exchange rate, market size, political instability, infrastructure, openness to market and military rule. Data constraints in Pakistan some determinants consider to be the inefficient.
Regardless many determinants like infrastructure have the positive impact on the FDI. Rehman et al(2010).GDP has positively related with FDI. Khan and Nawaz (2010).Whereas Anjum and Nishat find the positive relation of exchange rate with foreign direct investment..
Akthar found the negative impact of the political instability and military rule. Due to the data constraint the political instability consider to be inefficient. He also found that the openness to market is positively related to FDI.
The main objective of the paper is to examine the relationship of determinants of foreign direct investment and to analyze the determinants of foreign direct investment and its significance.


Literature Review:
One of studies to explore the locational determinants with reference to Pakistan is done by Akthar (2000). He uses the technique of the multivariate regression to determine the determinants. He uses the market size (openness to trade), relative interest rate and exchange rate, political instability and military rule as determinants. He found that the military regime results are mixed where as the political instability results are insignificant because the statistical data was not available. The econometrics analysis approach the issue what determines the inflow in economy. The locational factors need to improve in Pakistan. The market –seeking FDI, indicates high and stable exchange rate.
One of the studies Chowdhury and Mavrotas (2003) examine the relationship between FDI and economic growth by using the innovate techniques of econometrics. The techniques are used to find the direction of the two the variables. This study is organized in the countries of Chile, Malaysia, and Thailand by applying the Toda Yamanoto test .In this study time –series data is used from 1969- 2000.The objective to use the test of Toda Yamanoto 1) by looking the determinants of FDI. 2) The causality between the two variables. The unit root is test ADF and co integration methods (Johnsen’s test) are also applied.FDI has positive impact on the GDP but it depend on the trade regime degree of openness and human capital. The results found that in Chile GDP causes FDI and in Malaysia and Thailand there is inverse result that FDI causes...

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