Institutional quality, natural resources and FDI: empirical evidence from Pakistan

The purpose of current study is to investigate the impact of institutional quality and macroeconomic indicators on foreign direct investment (FDI) inflow in Pakistan. For this purpose, the dataset-covering the 1984–2013 time-span, was used to analyze this relationship. Institutional quality (political risk indicators) is the composite index of International Country Risk Guide (ICRG). Besides institutional quality, three macroeconomic indicators i.e. exchange rate, per capita GDP and natural resources, has been selected to develop a relationship. Unit root test, Cointegration test, autoregressive distributed lag model and error correction model were used. The results of unit root test indicated that all the variables are integrated at first difference. The results of cointegration test indicated that there exists a long run cointegration among the variables. The estimated elasticities show that institutional quality has a significant positive relationship with FDI both in the short and long run. Similarly, per capita gross domestic product has also a significant positive relationship with FDI in the short and long run. These results suggested that any positive change in institutional quality and per capita GDP will bring encouraging and boosting change in FDI inflow.