The Impact of Demand Management Policies On Domestic and Foreign Direct Investment in Case of Pakistan: A Time Series Analysis

Abstract

This study has examined the impact of demand management policies on domestic investment and foreign direct

investment in case of Pakistan over the period of 1980-2015. ADF unit root test is used for examining the

stationarity of the variables. Auto-regressive distributive lag approach (ARDL) is used for co-integration among the

variables of the models. The results of the study show that there exists long run relationship among the variables.

The results highlights that fiscal deficit has positive and significant impact on domestic as well as foreign direct

investment in Pakistan. While inflation rate is putting inverse impact on foreign direct investment. The results show

that interest rate has negative and significant impact on both domestic and foreign direct investment in case of

Pakistan. Broad money growth positively and significantly impacts FDI and DI. Real effective exchange rate shows

negative effect on both domestic and foreign direct investment. Trade openness shows positive effect on domestic

investment. The findings of the study recommended that government should not waste its revenue in order to meet

nonproductive expenditures. Rather government should utilize its revenue for productive purposes. This will be

helpful in increasing our domestic investment. If people prefer to increase investment in their own countries the

investment will increase and will eventually lead to increase the level of employment. The government should try to

make effective and efficient policy to encourage foreign investors to invest in Pakistan by giving subsidies and

ensure the protection of their capital. The monetary policy makers like banks should also look at their policies to

control interest rate because it has negative impact on domestic and foreign direct investment.