Impact of Foreign Direct Investment and Exports on the Economic Growth: A Case Study of Pakistan

This study investigated the impact of key factors like foreign direct investment (FDI), exports, exchange rate, terrorism and political instability on the economic growth in Pakistan on the basis of annual data from 1973 to 2010. The empirical analysis analysed the time series property of the data which was followed by checking the stationary status of all dependent and independent variables. Furthermore, the Johansen VAR-based co-integration approach was employed to examine the sensitivity of real economic growth to changes in foreign direct investment (FDI), exports, exchange rate, terrorism and political instability in the long run while the short run dynamics was confirmed using a vector error correction model. Results from Augment Dickey and Fuller (ADF) tests showed the evidence of a unit root problem in the data at the level. On the other hand, all variables are proved stationary at the first difference. The empirical findings further revealed that exports, FDI and exchange rate positively impacted the economic growth in Pakistan and, terrorism and political instability negatively affected the economic growth of Pakistan.