Vol. 6 No. 2 (2023): Pakistan Journal of International Affairs


Published 2023-06-20


Foreign Direct Investment (FDI) is widely acknowledged as a crucial catalyst for economic development, especially in emerging economies such as Pakistan. Its significance lies in the fact that it can introduce vital funds, fresh technologies, and knowhow to domestic markets. These advantages can stimulate progress and generate novel prospects for enterprises and individuals alike. Over the past few years, there has been a resurgence of interest in the significance of FDI in promoting economic growth. Global leaders are now more inclined to lure foreign investments to enhance their economies and raise the standard of living of their people. Foreign Direct Investment (FDI) has played a critical role in driving Pakistan's economic progress and development. The State Bank of Pakistan reports that FDI inflows saw a significant increase of 137% in the fiscal year 2020-21, amounting to $2.78 billion, demonstrating the country's concerted efforts to attract foreign investment in key sectors like energy, telecommunications, and construction. Our study aims to provide empirical evidence of the relationship between FDI and economic growth in Pakistan. We analyzed data spanning two decades, from 1996 to 2022, and examined the impact of FDI on Gross Domestic Product (GDP), while also considering various other factors such as political stability, terrorism, and trade openness. 

Our findings indicate a favorable influence of FDI on economic growth in Pakistan, particularly when coupled with liberalized trade policies. We observed a strong positive correlation between FDI inflows and GDP growth, indicating that foreign investment can serve as a potent driver for economic development. However, our analysis underscores the significance of other factors in augmenting economic growth in Pakistan. For instance, political stability emerges as a pivotal factor affecting FDI inflows and can be instrumental in attracting foreign investment. Similarly, the implementation of effective measures to combat terrorism can establish a secure and stable environment for businesses, thus fostering economic growth. In conclusion, our research provides empirical evidence of the positive impact of FDI on economic growth in Pakistan. However, it also underscores the importance of creating a supportive environment for foreign investment, including open trade policies, political stability, and effective measures to combat terrorism. By doing so, Pakistan can continue to attract foreign investment and accelerate its economic development