Charting Prosperity: The Ripple Effect of Inflation and Economic Growth on FDI

Abstract

The objective of this research study is to analyze the impact of inflation and economic growth on Foreign Direct Investment inflows in Pakistan. The data for economic growth, inflation and FDI have been taken from World Bank for the period of 2001 to 2022 and the collected time-series data has been analysed by using statistical software Stata. For checking stationarity of data, this study used ADF and PP unit-root test. The unit-root test showed mixed order of integration, therefore, this study used ARDL Model to examine the cointegration among variables. Moreover, Bound test has been applied to check whether cointegration exists or not, also various diagnostic tests such as Breusch-Pagan, Ramsey reset Test, Jarque-Bera, Breusch-Godfrey LM test etc are used in this study.

The long-run coefficient shows that there is positive relationship between economic growth &FDI and the relation is strongly significant, meaning that a 1% increase in economic growth enhances foreign direct investment by 2.251832% in the long-run. However, the estimated result highlights a negative and significant relationship between inflation rate and FDI, showing that a 1% increase in inflation rate reduces the foreign direct investment by 0.0914571 % in Pakistan. Furthermore, short run-result shows that there is positive relationship between economic growth and FDI, but there is negative association between inflation rate and FDI and both are significant. The Granger Causality test shows uni-directional relationship between inflation rate and economic growth with FDI.Policy makers should devise an effective policy to boost agricultural outputs to control demand-pull inflation in the short-run and long-run. Also, government should introduce skilled learning programs in higher education as compulsory at both college and university level to equip skilled human capital to increase output in the future rather than producing graduates fully equipped with useless theories without practical implications.