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

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.