All the underdeveloped economic systems are entrapped by the barbarous circle of poorness. These states lack the basic capital resources. Income of the people is really low due to which nest eggs are low and finally it ends in lower investings. In add-on, due to the lower income degrees the nonexempt capacity is low intending that authorities ‘s earning is besides low. Under such fortunes these states had to confront saving-investment spread & A ; Balance of payment spread. To carry through these spreads these developing states had to trust on Foreign Capital Investment to speed up the growing procedure and to make full saving-investment spread & A ; BOP spread. Foreign Capital Investment can come in many signifiers including ; Foreign Aid, Official Development Assistance, Official Aid, FDI, Foreign Portfolio Investment and adoption ( Mohey-ud-din, 2006 ) . Regardless of the fact that all the developing economic systems must trust on any of these beginnings to speed up the procedure of growing, the sum and the signifier of FCI differs from state to state and depends on the single economic status of that peculiar state. In instance of Pakistan, FCI plays a important function in the economic development. On one side Pakistan deficiency basic capital investing, engineering and human resource and on the other side state ‘s political and economic status forces it to trust on FCI.

During the period of 1950 Pakistan along with the other south Asiatic states pursued a policy of import permutation. In 1970 Srilanka took a progressive measure toward policy reforms in favour of progressive liberalisation and globalisation. These macro economic reforms were adopted by all south Asiatic courtiers due to the derived benefits. This Post reform period in all south Asiatic states is characterized by high growing and economic development. Pakistan introduced these reforms in late 1980 ‘s. One of the most of import benefits of these economic reforms was the increased influx of FDI ( Mehta, 2006 ) .

The current research merely concentrates on foreign direct investing instead than capital flows in general because it is closely connected to non merely the transportation of capital but besides helps in transportation of capital, direction & A ; selling accomplishments and advanced engineerings between states. And secondly, for the past 40 old ages and so the influx of FDI specifically in South Asia has increased drastically.

FDI is the investing made by a company outside its place state. For the place state it is the escape and for the host state it is the influx of, long clip investing based on long term net income sharing involved in international production. This definition is right but non complete as the of import issues of control and direction are non included in it. International investing can take two signifiers. It could either be portfolio investing, where the investors buy some non-controlling part of the stock, bond or any other fiscal security, or direct investing where the investor participates in the control and direction of such concern venture. This is the type of investing by transnational companies and it tends to lend more to economic growing than the portfolio investing ( Adewum, 2006 ) .

FDI brings in complimentary capital and engineering necessary for rapid growing every bit good as it provides entree to planetary production and selling webs. As noted above South Asiatic states had a reasonably restrictive government and it is merely in the last decennary that the policies had opened up and became contributing to greater foreign investing. Initially, FDI was allowed in a restrictive mode and on reciprocally advantageous footings where bulk interest were to be held by domestic houses. However, South Asiatic states tried to promote FDI more sharply in the 1890ss, by doing alterations in macroeconomic policies along with trade and FDI policies ( Mehta, 2006 ) .

The strength to pull FDI for all the major South Asiatic states in the epoch of 1990-2003 had more than doubled except for Pakistan. It can hence be interpreted that although the macro economic reforms had been successful in pulling greater FDI influxs but the influxs were non important when compared with other states of the same part.

As per the information in the above tabular array, Pakistan was non able to pull adequate sum of FDI to speed up the growing procedure because of the prevalent economic policies at that clip. Sri Lanka had the largest strength to pull FDI influxs ( 1.25 % of GDP ) followed by India and Pakistan ( Mehta, 2006 ) .

This research will discourse whether the alterations in those reforms bring any impact on the growing procedure or non. And if it does, so is it worthwhile for the authorities to modify those policies to pull more MNCs to convey FDI in Pakistan?

The intent of this research is to show the function played by FDI in speed uping GDP growing, so as to cognize whether the call for more FDI is genuinely justified.

The flow of FDI has been drastically increased in the last twosome of decennaries doing it a cardinal country for the farther research. Increasing attending has been paid in all developing states in recent old ages to reply the inquiry of “ how to pull more FDI ” . This accent on one side has increased the flow of FDI in the host state and on the other side it gives rise to uncertainnesss sing the profitableness analysis of doing such determination. Such as whether the impact of FDI on domestic employment pays more or costs more? So a batch of researches had been done on this subject so that these inquiries can be addressed ( OECD, 2002 ) .

The subject is of great importance because of the advantages that FDI brings to the place state. one of the chief advantage of foreign direct investing is that it helps in the economic development of the host state where the investing is being made through ; get the better ofing fiscal crisis, by allowing transportation of engineering, human accomplishments, rational belongings, heightening accomplishments of human capital, increasing authorities ‘s gross through revenue enhancement, by making new occupations, by bettering the quality of goods and services being produced, it boosts the exports sector etc plus there is besides some range for new research activities.

This research will assist the authorities in formulating and modifying the right policy mix to pull the targeted degree of FDI. It will besides assist the Central Bank in doing the financial policy where it can put the revenue enhancement marks, helps in finding the revenue enhancement rates every bit good as in the devising of pecuniary policy. The pupils can acquire the clasp of FDI on GDP by understanding the importance of this research which will be a beginning for the hereafter research, besides doing a think tank they can come up with new thoughts and supply consultancy to the local houses and enterprisers so that they can unify with MNCs to derive the cognition of advanced engineerings and accomplishments.

Sing the significance of the subject, this research has been planned. The nucleus intent of this research survey is to analyze the impact of the FDI on GDP growing of Pakistan. The organisation of this thesis follows as: a elaborate reappraisal of literature on the impact of FDI on GDP of the development states, the theoretical background of economic theories on FDI is presented in Section chapter II. Chapter III trades with the informations and methodological analysis. Chapter 1V discusses the consequences and readings while chapter V gives the decision and the policy recommendations.

Chapter 2: Reappraisal OF THE RELATED LITERATURE

The literature reappraisal is divided in to two parts. The first portion chiefly focuses on the basic theories underlying the foreign direct investing and the 2nd portion emphasizes on the theoretical model of FDI Flow and its impact on GDP growing of developing economic systems.

2.1. THEORIES OF FOREIGN DIRECT INVESTMENT

Theories played a important function in finding legal attitudes both nationally and internationally. Theories of FDI asserted that the footing for such investing lies in the dealing costs of reassigning proficient and other cognition. Three of import theories of FDI are discussed below:

2.1.1 Neoclassic Economic Theory of FDI

Harmonizing to the Bergten, Horst & A ; Moran ( 1978 ) the neoclassical economic theory stated that FDI positively contributed to the economic development of the host state and increased the degree of public public assistance. Some of the protagonists of Neoclassic economic theory and the research workers who had further worked in that field includes ; Seid ( 2002 ) , Kojima ( 1978 ) , Antonelli ( 1991 ) , Reuber ( 1973 ) ; Sornarajah ( 1994 ) ; Bergten, et Al. ( 1978 ) , Kennedy ( 1992 ) , Chu ( 1989 ) , Lall ( 1993 ) .

The principle behind this theory was that, that the MNC ‘s by conveying FDI in to the host state influenced the quality and measure of capital formation in that state. On one manus this influx of capital from MNCs and its reinvestments of net incomes increase the entire nest eggs of the state, increases authorities ‘s gross via revenue enhancement and other payments and on the other manus this extract of capital reduces the BOP force per unit area of the host state ( Seid, 2002 ) .

The other statement that supported the neoclassical theory was that FDI did non merely brings advanced engineering but managerial accomplishments, selling accomplishments, market information, organisational experience, and the preparation of workers as good ( Kojima, 1978 ) .

MNCs served as a primary channel for the transportation of engineering from developed to developing states. But the benefits derived from this transportation of engineering depended on the extent to which these inventions are diffused locally. This cost of engineering transportation got affected by a figure of factors. And due to the general scarceness of these factors in developing states, the cost of acceptance of new engineering remained high ( Antonelli, 1991 ) .

The advocates of neoclassical theory further argued that FDI raised competition in an industry with an ultimate betterment in productiveness. This increased competition lead to better allotment of resources, better use of capital, efficient direction and increased in market efficiency. MNCs through Foreign direct investing provided local industry the exposure of international markets, which lead to greater competition, more chance of engineering transportation and finally resulted in economic development ( Kojima, 1978 ) .

FDI helped in employment coevals which finally influenced distribution of income. It besides helped in coevals foreign exchange which facilitated in make fulling balance of payment spread Reuber ( 1973 ) ; Sornarajah ( 1994 ) ; Bergten et Al. ( 1978 ) . FDI besides helped in upgrading the local substructure installations which resulted in economic development Sornarajah ( 1994 ) . FDI accelerated the economic development by heightening the administrative, proficient and managerial capablenesss of the host state ( Kennedy, 1992 ) .

The steering rule on the Treatment of Foreign Direct Investment incorporated the neoclassical theory and stated that a larger flow of foreign direct investing brought important benefits to the universe economic system in general and for the developing states in specific in footings of technological promotion, greater competition, enlargement of international trade, enhanced selling & A ; direction accomplishments and entree to international market. The World Bank steering rules on the Treatment of FDI demonstrated that a proper policy mix and openness to FDI had brought more benefits to the host state ( Chu, 1989 ) .

2.1.2 Dependency Theory of FDI

Harmonizing to the Dependency school theory, the impact of foreign direct investing from developed states through transnational corporations ( MNCs ) on developing states was harmful for long term economic growing of the underdeveloped states. Dependency theory ‘s ideas were based on Karl Marx ‘s theory of development and underdevelopment ; Paul Baran ‘s analysis of economic retardation and economic growing ; Andre Gunder Frank ‘s analysis of the development of underdevelopment ; and the Hagiographas of Samir Amin on unequal development ( Fan, 2003 ) .

Dependency theory argued that FDI and MNCs were harmful for the long term economic development of the developing states in specific. It believed that the rich states becomes richer and exploits the labour and other natural resources of the underdeveloped states. And the underdeveloped states thereby put in to conditions of go oning poorness. It caused development of labour, hindered growing and caused income inequality. So maintaining in head the above harmful affects, the developing states must develop independently without depending on FDI or MNCs.

The influence of dependence theory peaked in 1970s. Assorted states including East Asiatic and Latin American adopted this point of position and demonstrated a hostile attitude toward FDI. But after seeing the harmful affects of following these policies on the economic system, these states shifted the attending to more broad policies to pull foreign direct investing. This theory is out of the range for this research. Hence it ‘s non discussed extensively.

2.2. Theoretical Model of FDI Flows and Growth

The function played by the Foreign Direct Investment in the economic development of developing states remains problematic in the literature. Many research workers had proved that FDI is positively related to GDP growing and FDI enhances the procedure of GDP growing. The research workers that proved its important and positive impact on economic development, includes ; Chenery & A ; Strout ( 1966 ) , Bosworth, Collins & A ; Reinhart ( 1999 ) , Loungani & A ; Razin ( 2001 ) , Moss, Ramachandran & A ; Shah ( 2005 ) , De Gregorio ( 2003 ) , Feridunm ( 2004 ) , Bornsztein, Gregorio & A ; Lee ( 1998 ) , Sanchez-Robles ( 1998 ) , North ( 1956 ) , Borensztein, De Gregario & A ; Lee ( 1998 ) , Glass & A ; Saggi ( 1998 ) , Blomstrom, Lipsey & A ; Zegan ( 1994 ) , Balasubramanyan, Mohammed, Salisu & A ; Sapsford ( 1996 ) , Bengos & A ; Sanchez-Robles ( 2003 ) , Nabenende, Ford, Sen & A ; Slater ( 2002 ) , Aluko ( 1961 ) , Brown ( 1962 ) , Obinna ( 1983 ) , Oseghale & A ; Amonkhienan ( 1987 ) , Das ( 1987 ) , Din ( 1994 ) , Balasubramanyam, Mohammad, Salisu & A ; Sapsford ( 1996 ) , Dees ( 1998 ) , De Mello ( 1997 ) , Adewumi ( 2006 ) , Hasen & A ; Giorgioni ( 2006 ) , Athukorala ( 2003 ) , Zhang ( 2004 ) , Trevino & A ; Upadhyaya ( 2003 ) , Sjoholm ( 1999 ) & A ; Agrawal ( 2000 ) . While some research workers had highlighted its negative facets every bit good.

On the footing of a research on least developed economic systems, it had been concluded that FDI had a important and positive impact on GDP and it helped in raising the economic activity. The survey besides made an of import statement, stating that FDI played a really critical function in bestiring the economic growing ( Chenery & A ; Strout, 1966 ) .

Bosworth et Al. ( 1999 ) analyzed the impact of assorted signifier of FCI on GDP. The research proved that, out of assorted signifiers of FCI including loans, adoption, portfolio investing and other signifiers of FCI, FDI had a stronger positive impact on GDP in developing economic systems. It had a strong positive consequence on investing and salvaging which finally lead towards more economic development while other signifiers of FCI may had a negative impact on salvaging and investing, taking to a negative impact on GDP. This research concluded that FDI is the most effectual signifier of FCI which helped in fixing the procedure of GDP growing.

It had been concluded that out of the different signifiers of capital flow ( FDI, portfolio investing and primary bank loans ) to the Least Developed Economies, FDI was discovered to be the most resilient. It greatly helped in speed uping the growing procedure of developing states ( Loungani & A ; Razin, 2001 ) .

A similar decision had been given in a survey by Moss et Al. ( 2005 ) . The survey revealed that FDI contributed more to GDP as compared to local investing. So instead than doing attempts to increase local investing, the authorities must stress more on pulling Foreign Direct Investment because FDI non merely bring capital but engineering, direction and international exposure which in combination resulted in more effectual and efficient mix in speed uping the procedure of economic growing ( GDP ) .It might stop up in pass overing local houses out of the market but for that the authorities had to do the right policy mix maintaining in head the cost and benefits of MNCs.

It had been proved that the part of FDI to GDP is three times more than that of local investing De Gregorio ( 2003 ) . The survey revealed that FDI brings in new expertness in the local market with the benefit of holding entree to foreign markets. Harmonizing to the analysis, the research worker found out that increasing aggregative investing by 1 per centum point of GDP increased economic growing of Latin American states by 0.1 % to 0.2 % a twelvemonth, but increasing FDI by the same sum increased growing by about 0.6 % a twelvemonth during the period 1950-1985, turn outing that FDI is three times more efficient than local investing.

Feridunm ( 2004 ) conducted a survey to analyze the relationship between GDP and FDI in the economic system of Cyprus. The survey verified that there is a strong positive relationship between GDP and FDI and stated that if the economic system of Cyprus manages to acquire the higher FDI, its GDP will increase and frailty versa. Further the consequences of the research suggested that the economic development of the state resides on its ability to acquire more FDI. So the authorities must do policies that can assist the state in pulling more FDI.

Bornsztein et Al. ( 1998 ) besides carried out a research to prove the impact of Foreign Direct Investment on a state ‘s economic development. The information on the FDI flow from 16 states was taken and the cross state arrested development model was applied. The analysis reported that FDI played a positive and important function in hiking the economic growing through engineering transmittal. However, the analysis was based on an premise that the host state must had minimal threshold of human capital so that new engineering can be utilized more expeditiously.

Robles ( 1998 ) besides tested the relationship between FDI and GDP in Latin America in the period of 1975-1985 and reported that FDI and GDP had a really strong relation. Increase in FDI had caused a definite addition in GDP growing. And the impact of FDI on GDP was extremely important and positive for this peculiar part.

FDI had a positive impact on GDP and Foreign Direct Investment played an of import function in back uping the import excess and in heightening entire investing that helped in the economic development ( North 1956 ) .

Borensztein et Al. ( 1998 ) & A ; Glass & A ; Saggi ‘s ( 1998 ) research proved that FDI is assumed to heighten domestic capital which finally lead to excite the productiveness of domestic investings which thereby had a important positive impact on GDP. Therefore, FDI had through empirical observation been found to excite economic growing.

Blomstrom et. Al ( 1994 ) reported a positive impact of FDI on economic development with a status that the host economic system must hold a threshold degree of income above which Foreign Direct Investment seems to hold a positive impact on GDP and below which it does non.

Balasubramanyan et Al. ( 1996 ) reported positive impact of FDI on economic development.

The impact of FDI varied across states. It mostly depended on the trade policy of the host state. This survey revealed that the impact of FDI on GDP is more in export advancing than import replacing states. Therefore the trade policy must be made in such a manner that it can pull more FDI to back up the state ‘s economic growing.

Bengos & A ; Robles ( 2003 ) proved that FDI is significantly and positively correlated with economic growing. Minimum capital ( human ) , economic stableness and stable markets are the necessary stipulations that need to be met if the state wants to profit from FDI.

Nabende et Al. ( 2002 ) research proved that the long-run impact of FDI on GDP is important and positive for relatively economically less advanced economic systems but negative for the economically advanced states.

Aluko ( 1961 ) , Brown ( 1962 ) & A ; Obinna ( 1983 ) reported positive linkages between FDI and economic growing in Nigeria. Oseghale & A ; Amonkhienen ( 1987 ) and founded that FDI had been positively associated with GDP, reasoning that greater influx of FDI spelled a better economic public presentation for the state.

Das ( 1987 ) ; Din ( 1994 ) ; Balasubramanyam et Al. ( 1996 ) and Borensztein et Al. ( 1998 ) stated that FDI had been introduced as the factor explicating positive impact on GDP growing through engineering transportation in add-on to human capital. Dees ( 1998 ) submitted that FDI had been of import in explicating China ‘s economic growing, while De Mello ( 1997 ) presented a positive correlativity between FDI & A ; GDP for selected Latin American states. Findingss of Xu ( 2000 ) for US FDI in 40 states for the period 1966-94 besides supported the determination of De Mello that the transportation of engineering through FDI contributed more to the productiveness of developed states as compared to developing states, which the research attributed to miss of equal human capital. The OECD ( 2002 ) merely stated that FDI increased efficiency of resources and raised factor productiveness in the host state, so it affirmed positive influence of FDI on GDP growing as positive.

Adewumi ( 2006 ) examined the part of foreign direct investing in Africa ‘s economic growing. Data for the full continent and information for 11 states within the continent were used for the analysis from 1970-2003. The states used for the analysis includes ; Angola, Botswana, Burkina Faso, Central African Republic, Cote vitamin D ‘ Ivoire, Egypt, Mali, Nigeria, South Africa, Tunisia and Republic of Benin. Eleven states were selected based on the undermentioned standards: growing rate, strong currency value, population and Geographical spread. It was discovered that the part of FDI to growing is estimated to be positive in most of the states but non important. GDP growing rate was used as a dependent variable while FDI growing rate was used as independent variable. Other variables that were considered for the survey include ; gross capital formation and net exports. From the analysis it was proved that the impact of FDI on GDP is estimated to be positive for most of the states. But in the other states where the consequence is non positive, did non bespeak that FDI ‘s impact on GDP is negative. The ground for this negative impact was that some impact of FDI in the host state can non be measured quantitatively, e.g. cognition acquisition, engineering, international image, and it may take a considerable clip before these variables affect growing.

Hasen & A ; Giorgioni ‘s ( 2006 ) research had assessed the impact of FDI on GDP growing of four AMU states including ; Algeria, Libya, Morocco and Tunisia1 – between 1990 and 2006. The variables under analysis included ; entire end product, entire factor productiveness, domestic capital, foreign capital, labour input and human accomplishments. These states were chosen for analysis because as most other developing states these states were the one which were transitioning toward the policies of pulling influxs of FDI. The research through empirical observation proved that FDI and GDP had a strong relation. The FDI influxs were an of import determiner of GDP growing. The research analyzed that the positive impact of FDI on the economic system depended on its interaction with unfastened trade policy, macroeconomic stableness, better instruction degree and filling of engineering spread. The research suggested that AMU states would make better by concentrating on human capital, developing domestic houses, making a stable macroeconomic model and supplying productive investings to get down up the procedure of economic development.

However, some economic experts had analyzed negative impacts of FDI on economic growing. Leff ( 1969 ) & A ; Griffin ( 1970 ) had argued that the foreign investing could negatively impact the economic growing by replacing the domestic nest eggs. One of the chief statement against the influx of FDI was that transnational companies ( MNCs ) replaced domestic houses, introduced unsuitable production engineering and created BOP crisis through transportation of net incomes from the host state ( Sahoo ( 2006 ) .

MNCs conveying FDI by and large had advanced engineering, accomplishments and resources through which the market portion of the domestic houses get eroded and can herd out the local investing Markusen & A ; Venables, ( 1999 ) ; Agosin & A ; Mayer, ( 2000 ) & A ; Kumar & A ; Prakash, ( 2002 ) . These MNCs besides made usage of advanced engineerings in the production procedure which lowerd the demand of labour. These phenomenons lead to higher rates of unemployment which lowered the economic development.

Carkovic & A ; Levine ( 2002 ) concluded that FDI did non had a positive impact on economic development. Mwlima ( 2003 ) besides concluded that the inducements that most African states were offering to pull the FDI ended up in adding to the economic jobs taking to a state of affairs where the inducements being offered offsite any additions from FDI. Zambia was the authoritative illustration which explained the proved this research. Findingss of the research claimed that the purpose of any MNC is to do net income instead than supplying economic development, hence the host states must be really cautious in explicating any policies to pull FDI.