Pakistan’s FDI Conundrum: Missing the Efficiency Mark

Abstract

This study investigates the impact of efficiency indicators on foreign direct investment (FDI) inflows in Pakistan's manufacturing sector, utilizing data from 1981 to 2019. The analysis focuses on key efficiency indicators, including wages, worker productivity, and skilled labour availability, to elucidate the determinants of FDI attraction. By exploring the relationship between these indicators and FDI inflows, this research aims to contribute to the existing literature and inform policy decisions aimed at enhancing Pakistan's competitiveness in attracting foreign investment. The study's temporal scope is deliberately limited to 2019 to mitigate potential distortions caused by the COVID-19 pandemic, ensuring the reliability and robustness of the findings. The efficiency variables employed in this study, specifically the ratio of productivity to wages, skill level, and labour force supply, do not exhibit statistically significant relationships with the outcome variable, suggesting that these factors may not be primary drivers of FDI attraction. Both the lower level of human capital and the weak supply and poor efficiency of the labour force have a significantly negative impact on FDI inflows, but the inclusion of political economy factors renders labour market forces ineffective in explaining FDI inflows. Dictatorial regimes attract 52% to 63% higher FDI inflows compared to democratic ones when all other factors are equal. We, therefore, conclude that Pakistan has not been able to attract efficiency-seeking FDI and that it has mainly accumulated non-efficiency-seeking FDI. Future research on the subject must, (i) explore the scope of efficiency-seeking FDI inflows for other sectors of the economy, (ii) highlight policy drivers and variables that can help attract efficiency-seeking FDI, and (iii) identify policies that can help explore this potential.

JEL Classification Codes: J24, P33, E24