FOREIGN DIRECT INVESTMENT AND SECTORAL GROWTH DYNAMICS: EVIDENCE FROM PAKISTAN

Abstract

This study explores the sector-wise impact of Foreign Direct Investment (FDI) on Pakistan’s economic growth using time series data from 1997 to 2022. The research focuses on three key sectors—primary (agriculture), secondary (manufacturing), and tertiary (services)—and employs Johansen Co-integration and Vector Error Correction Model (VECM) to analyze long-run and short-run relationships between GDP and FDI. Results reveal a strong positive long-term impact of FDI in all sectors, with the secondary sector showing the most significant contribution to GDP growth. In contrast, the services sector displays a negative impact, likely due to capital outflow and crowding-out of local businesses. The primary sector, despite potential, faces constraints like low infrastructure and rising unemployment from mechanization. The study recommends targeted policies to attract FDI in the manufacturing sector, improve infrastructure, and ensure technology absorption. Findings emphasize on the importance of sectorial focus to maximize the economic benefits of FDI in developing economies like Pakistan.