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Impact of FDI on the economic growth rate in Pakistan

Introduction Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to non-industrialized countries are increasing sharply. FDI is entitled for the long time period such as 5 years.
FDI and economic growth: Economic growth is the aspect to a nation’s progress and prosperity. Investment provides base to the economic development to the developing countries. Standard economic theory points to a direct, causal relationship between economic growth and FDI that can run in either direction. On the one hand, FDI flows can be induced by host country economic growth if the host country offers a sizeable consumer market, in which case FDI serves as a substitute for commodity trade or if growth leads to greater economies of scale and cost efficiency in the host country. On the other hand, FDI itself may contribute to host country economic growth, by augmenting the country’s capital stock, introducing complementary inputs, inducing technology transfer and skill acquisition, or increasing competition in the local industry. Of course, FDI may also inhibit competition and thus hamper growth, especially if the host country government affords extra protection to foreign investors in the process of attracting their capital. Foreign Direct Investment (FDI) has emerged as the most important source of external resource flows to developing countries over the 1990s and has become a significant part of capital formation in the developing countries despite their share in global distribution of FDI continuing to remain small or even declining. The role of the foreign direct investment (FDI) has been widely recognized as a growth-enhancing factor in the developing countries. The effects of FDI in the host economy are normally believed to be increase in the employment, increase in productivity, and increase in exports and, of course, increased pace of transfer of technology. FDI contributes to economic growth directly through new technologies and other inputs as well as indirectly through improving human capital, infrastructure, and institutions and the level of a country’s productivity depends on the FDI, trade, domestic investment. Since the mid 1970s, however, developed countries have attracted the bulk of FDI and correspondingly, the developing countries failed to create an enabling environment for foreign investors. The 1980s and 1990s have seen considerable changes in the level and composition of FDI in the developing countries. Except for 1989, inflows of FDI to developing countries increased steadily between 1984 and 1992. Most remarkably, while inflows to the developed countries declined in 1991, they grew by more than 20 percent to the developing countries, to $ 39 billion. In 1995, FDI into developing countries increased to at least $ 100 billion. This boom in investment flows is a reflection of sustained economic growth and continuing liberalization and privatization in developing countries.
FDI to Pakistan: Pakistan, being a developing country, has not been traditionally a large recipient of FDI. In the 1980s the average annual inflows of FDI were around $ 42 million for Pakistan. If FDI is taken in relation to total gross domestic investments, it constitutes 1.4 percent of it. Foreign direct investment brings into the recipient economy resources which can play an important role in the modernization of the national economy. FDI is now considered to be an instrument through which economies are being integrated at the level of production into the globalizing world economy by bringing a package of assets including capital, technology, managerial capacities and skills and access to foreign markets.
Chapter#2 Review of literature: The author described that foreign direct investment (FDI) is often seen as an important channel for economic growth in the developing countries. It affects the economic growth by stimulating domestic investment, increasing human capital formation and by facilitating the technology transfer in the host countries. (Falki, 2007).
According to the author it is described in the article that there are two major views, which are independently and often jointly challenged. First is the policy view: Aid works only in the presence of good policy i.e., the interaction term has a positive and significant effect on growth good policy is mostly important in the determination of growth. Second Diminishing Returns view: Aid works, but with diminishing returns, irrespective of good policy i.e., the aid-squared term drives away the significance of the interaction term. If the policies of the recipient country are very bad then it would not growth-enhancing at all. It is only in this sense that we suggest reasonably good policy is needed to achieve any aid effectiveness (Alvi, Mukherjee, Shukralla, 2008).
In this article the author described that in Pakistan the saving rate in Pakistan is very low as compared to other developing countries. The most important factor affecting saving rate according to the author is foreign capital inflow. Because the major portion of the foreign capital inflow to Pakistan was utilized in consumption purpose so the inflow of foreign capital into Pakistan’s economy has reduced the saving rate in private and public sector. It is suggested by the author that saving rate can be increased by liberating the foreign trade and payment sector (Khan, Hasan, Malik, 1992).
The significance of foreign direct investment (FDI) flows is well documented in literature for both the developing and developed countries. Over the last decade foreign direct investment have grown at least twice as rapidly as trade (Meyer, 2003).
In this article the author described that because of shortage of capital in the developing countries, there is need of capital for their development process, and the marginal productivity of capital is higher in these countries. Mostly investors in the developed countries seek high returns for their capital. Hence there is a common benefit in the international movement of capital. Liberalization of the economies in many developing countries has led to a severe competition for inward FDI in these countries. As far as Pakistan is concerned during early 1980s, the government in Pakistan has initiated market-based economic reform policies. These reforms began to take hold in 1988. In the 1990s, the government further liberalized the policy and opened the sectors of agriculture, telecommunications, energy and insurance to FDI. But, due to political instability FDI remained low. Author further described that political stability, peaceful law and order situation, level of technical labor force and mineral resources and liberal policies of the government attracted foreign investors in Pakistan (Nishat

What economic impacts does Singapore tourism have

What economic impacts does Singapore tourism have? Tourism has a variety of economic impacts. Tourists contribute to sales, profits, jobs, tax revenues, and income in an area. The most direct effects occur within the primary tourism sectors which are accommodation, restaurants, transportation, entertainment, and retail trade. Through secondary effects, tourism affects most sectors of the economy. An economic impact analysis of tourism activity normally focuses on changes in sales, income, and employment in a region resulting from tourism activity.
The tourism industry is a primary engine of growth in the Singapore economy. The tourism sector is closely linked to several key economic sectors and sub-sectors such as transport, construction, wholesale and retail trade, hotels and restaurants. Tourism spending has sustained domestic demand. Changes in tourism expenditures will change the sales revenues of firms catering to tourist needs for different goods and services, which will change the sales revenues of various direct supplies of catering firms. This in turn will change the sales revenues of other firms from whom the direct supplies purchase inputs. As the recipients of the direct and indirect tourist expenditures spend their changed incomes, the demand for goods and services will change again. As a result, the ultimate change in GDP, total value added and employment will be much larger than the initial change in the tourism industry.
According to Results for Singapore, Total economy-wide activity (US$ bn), between 1988 – 2008. The total gross domestic product in Singapore has US$25.4211bn in early year of 1988 and increased all along the year until 1997 has US$95.8666 bn. After that, between years 1997 until 2000 is no in a fixed pattern, but in year 2001 is start increased until US$181.87 bn in year 2008. And for the direct and indirect impact in economy aggregates, in year 1988 has US$18.6289 bn increased 3 years until US$21.2699 bn in year 1990. After that, start from year 1990 has decreased until US$12.1081 bn in year 1997. And for the year 1998 and 1999 has increased US$0.965 bn become US$13.0731 bn then start from year 1990, it is decreased until US$7.81557 bn in year 2008.
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