In economic literature, it has been widely accepted that Foreign Capital Inflow (FCI)
stimulates economic growth in the developing world. FCI enables receiving countries to achieve
investment levels beyond their own domestic
savings. More importantly, FCI is an important means
of transferring modern technology and innovation from developed to developing countries.
However, there is convincing evidence that the growth enhancing effect of FCI varies from country
to country, and for some countries FCI can even adversely affect the growth process (Ali,
1993; Balasubramanyam et al., 1996; Borenstein et al., 1998; De Mello, 1999; and Lipsey, 2000).
The main advantage of inflows of foreign capital and resources through its externalities is
the adoption of new (foreign) technology, which can happen via licensing agreements,
beginning competition for resources, employee training and knowledge, and export spillovers. These
benefits, together with direct capital financing affect the major macroeconomic variables viz.,
domestic investment, technology and employment generation, as well as skilled labor, environment
and export competitiveness particularly, in developing countries. Pakistan energetically seeks
overseas inflows of capital and resources (Ali,
1993).
The main objective of this effort is to investigate the impact of FCI on economic growth
in the case of a small developing economy, Pakistan. The present endeavor employs
Autoregressive Distributed Lag (ARDL) approach developed by Pesaran et al. (2001) and Error Correction Model (ECM) with regard to the Pakistani data. |
