Interaction between Domestic Investment and Foreign Direct Investment (FDI) in Pakistan

This paper has investigated interaction between domestic investment and foreign direct investment ( FDI ) for period 1976 to 2010 for Pakistan. Theoretical literature pointed positive relation between FDI and domestic investment and most of empirical studies also support positive correlation expect few cases. FDI improves domestic investment through technological diffusion, gain economies of scale and provide access to international market. The study is also trying to evaluate the interdependence of FDI and domestic investment. This study adopted  unit root analysis, cointegration and causality techniques for the empirical investigation; the outcomes of this study suggest that FDI has positive impact on investment and similarly domestic investment has positive association with FDI which implies that FDI and domestic investment reinforce each other and thus we reject the crowding out Hypothesis in case of Pakistan. There is need of popper policy implementation and government should give incentives to augment FDI inflow, including subsidies and tax exemption to the foreign firms.