Foreign Direct Investment and Economic Growth in Pakistan: An Empirical Investigation of Dynamic Relationships
Abstract
This study examined the dynamic relationship between foreign direct investment (FDI) and economic growth in Pakistan, with particular focus on the short-run relationship, long-run relationship, and adjustment process over time. A quantitative longitudinal time-series research design was employed using annual secondary data for the period 2015–2024. FDI was measured through net FDI inflows as a percentage of GDP, while economic growth was measured through annual real GDP growth, with trade openness, domestic investment, and inflation included as control variables. The data were analysed using descriptive statistics, Pearson Product-Moment correlation, unit-root tests, the Autoregressive Distributed Lag (ARDL) bounds-testing approach, short-run and long-run coefficient estimation, and an Error Correction Model (ECM). The Pearson correlation showed a positive association between FDI and economic growth (r = 0.624, p = 0.054), although it did not reach the conventional 5% significance level. However, the ARDL results demonstrated a significant positive short-run effect of FDI on economic growth (B = 0.284, p = 0.041) and a significant positive long-run relationship (B = 0.417, p = 0.031). The ARDL bounds test confirmed cointegration, with an F-statistic of 5.284, exceeding the 5% upper-bound critical value of 4.01. Furthermore, the error-correction coefficient was negative and statistically significant (ECM = −0.681, p = 0.025), indicating that approximately 68.1% of short-run disequilibrium was corrected towards long-run equilibrium within one period. The findings demonstrate that FDI can contribute to Pakistan’s economic growth through increased capital formation, productive capacity, technological development, and sustained economic activity. The study highlights the importance of maintaining favourable financial, trade, and investment conditions that enable the domestic economy to effectively absorb and utilise foreign capital for sustained economic development.