Analyzing the Impact of Trade Openness and Foreign Direct Investment on Economic Growth of Pakistan

Abstract

This study examines how different macroeconomic factors affect Pakistan's economic growth. A nation's ability to expand economically depends on foreign direct investment (FDI) and trade openness (TO). Using annual data from 1980 to 2022, this article investigates the relationship between FDI, inflation, trade openness, real effective exchange rate (REER) and GDP in Pakistan. The findings indicate that trade openness, FDI, REER, and GDP have a substantial and positive relationship. The foreign direct investment (FDI) affects economic growth positively and significantly with a coefficient value of 0.9927 (P=0.0006<0.01). There is a significant and positive relationship between trade openness and economic growth having coefficient value of 0.1205 (P=0.0036<0.01). The real effective exchange rate also affect Pakistan’s economic growth significantly with a coefficient value of 0.0356 (P=0.0000<0.01) and positively. However, inflation has indicated the impact on economic growth of Pakistan which is negative but insignificantly. The value of R2 is 0.68 indicating that 68 percent variation in Pakistan’s economic growth is explicated by FDI, inflation, trade openness, along with real effective exchange rate. The value of F-statistics is 20.27 (P=0.0000<0.01) indication overall significance of the model. The real income growth and employment are expected to increase as a result of improved potential output growth, thereby, providing a stable exchange rate environment and increase the capacity to substitute imports and exports.