Literature invested in the business for generating profits in

Literature Review

FDI is a vital factor for the improvement of the
economy of developing countries. It is generally recognized that FDI
builds efficiencies and advances the improvement of host countries. Be that as it may, continuous considerations identifying with
the relationship amongst FDI and Economic growth. A few researchers find that a
positive relationship exists, while others
demonstrate that there is a negative relation
between two. Others perspective is that either is a weak relation or no relation between FDI & economic growth.
Studies on FDI have produced heterogeneous outcomes using diverse techniques.
This paper investigates the relationship between FDI, Economic Growth, and Financial Development.

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Economic Growth (GDP Per Capita)

The GDP is one of the significant
factor used to access the wellbeing of a nation’s economy. It consists on
the total amount of all goods &
services that are produced within one
year within a country.

“The GDP is one the major
indicators used to evaluate the health of a country’s economy. It represents
the total dollar value of all goods and services produced in a country over a
specific time period” (Iqbal,  A. M. Mehmood 2013). The size of the economy is shown by GDP. As GDP per capita of Pakistan is
US$1272.441, evaluated in 2013.

Foreign Direct Investment (FDI)                                                                                                      

FDI is regarded as the possession or control of 10 percent or greater
amount of venture ‘s voting securities or the proportional enthusiam in an unincorporated business (Griffin, 2007). ( Mariotti et al. (2003)
stated that FDI inflows to advanced countries are generally horizontal
investments driven by market seeking strategies. And according to (Botri?, 2006), “HFDI replicates the whole
production process of the home country in a foreign country”.

“FDI is the sum of equity
capital, reinvestment of earnings and other long- and short-term capital as
shown in the balance of payments” (Iqbal, A. M.
&Saqib Mehmood 2013). Pakistan inward FDI, US$1.333 billion
and it contribute over the fringe with
a total outward FDI of US$212million in 2013.

FDI is the total capital invested
in the business for generating profits in
foreign country rather than the home country in form of securing business
operations and procuring business profits in the other country.

Gross fixed capital formation (GFC)

“GFC – formerly gross domestic
fixed investment – includes all those activates
or actions by the state in improving infrastructure, human capital, and commercial activities, as well as in improving
social and security status within the country” (Iqbal,
A. M. &Saqib Mehmood 2013).
According to the System of National Accounts
(SNA), net acquisitions of valuables are considered also capital
formation. The GFC (percent of GDP) in Pakistan reported at 2.522 in 20133.

Relationship between FDI & Economic Growth

(Balasubramanyam, 1996) found that FDI positively
impacts economic growth of host nations by adopting
export promoting strategy rather than import substitution strategy. By
utilizing cross -sectional data from 64
developing countries, using ordinary least square (OLS) method.

(Borensztein, 1998) by utilizing data 69 nations
from 1970 to 1989 to test the impact of FDI on Economic growth. They find out
that FDI has strong outcome while in the full usage of innovation and
relatively better than domestic investment. (Nair-Reichert, 2001 ) used a panel data estimation
method to check the causal relationship between FDI and growth. They found that
the relationship between investment and economic growth is highly heterogeneous
in developing countries and that heterogeneity will create misleading results.

(Zhang, 2001) investigated the effects of
FDI on China’s income growth and market-oriented
transition. By applying growth model, this study used the panel and cross-sectional data for the period 1984-1998. The
findings of this study examined that FDI helps
China’s transition and promote income growth.(Li, 2005) examined the impacts of FDI on GDP. They examine
Panel Data from 84 countries for the period 1970-1999. By actualizing the
single & simultaneous equation technique, it found that there is noteworthy
endogenous relation amongst FDI & Economic Growth.

(Chowdhury, 2006) used data from three
countries – Chile, Malaysia, and Thailand
from 1969 to 2000. This study used an innovative method for testing the
causality between FDI and growth. Its researcher concluded that GDP causes FDI
in Chile and not the other way around. Additionally they  found that there exist Bi-directional causality
amongst GDP and FDI, notwithstanding, in case of Malaysia and Thailand. (Pournarakis, 2007) examined data from 1974-1994
to find the effects of FDI on Economic Growth. They conclude that effects
varies from area to segment. Therefore outcomes shows the significance of
specific industry qualities in assessing the impacts of FDI inflows on local
communities.

(Mum, 2008) used annual data from the Malaysian economy from
1970 to 2005 and examined the relationship between FDI and economic growth by
using simple OLS regression method. They found outcome that a positive relationship
exists amongst the two. By utilizing data
from 66 developing countries to research the causality between FDI and economic
growth. FDI found to influence growth in 29 of these countries, Yet economic
growth not found to influence FDI by any means.

(Wang, 2009) utilized data of 12 Asian
countries from 1987 to 1997 to find out either FDI has an impact on economic
growth or not. Despite the fact that endogenous growth theory predicts a
positive relation amongst internal FDI and Economic growth. The examination
utilized FDI in various areas and delivered equivocal outcomes by reasoning
that FDI upgrades financial development in assembling however not in
non-producing divisions.