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Number of Downlaods: 74

Published Date: Sep 19, 2020

Pakistan fails to attract efficiency seeking Foreign Direct Investment? (W-191)


This study assesses as to how much Foreign Direct Investment (FDI) inflows to Pakistan can be explained through efficiency indicators such as wages in the manufacturing sector, output per worker, the level of human capital and labour force supply. Findings from the analysis using data from the manufacturing sector for the period between 1981 and 2017 show that labour market variables have no significant role in explaining FDI inflows to Pakistan. All the variables, including output to labour cost (OLC) ratio, the level of human capital and the supply and efficiency of the labour force have been statistically insignificant in this regard. Both the lower level of human capital and the weak supply and poor efficiency of the labour force have a significantly negative impact on FDI inflow, but the inclusion of political economy factors renders labour market forces ineffective in explaining FDI inflows. Dictatorial regimes attract 52% to 63% higher FDI inflows compared to democratic ones when all other factors are equal. We, therefore, conclude that Pakistan has not been able to attract efficiency seeking FDI and that it has mainly accumulated non-effeicency seeking FDI. Future research on the subject must i) explore the scope of efficiency seeking FDI inflows for other sectors of the economy, ii) highlight policy drivers and variables which can help attract efficiency seeking FDI, and iii) identify policies that can help explore this potential.
JEL Classification: J24, P33, E24

Keywords: FDI; Labour Market; Labour Productivity, Human Capital; Investment; Pakistan