In the fast, dynamic and continuously altering universe, about every state whether developed or developing, big or little, needs the foreign direct investing so as to ease and hasten its socio-economic development. In this respect, the FDI can take and act upon the state ‘s growing, industrial construction, employment and the trade form more successfully than any other capital flows. Hence, the FDI can impact and better significantly and well the degree of end product and the trade of a state and can besides speed up and rush up its growing and development. Further, it plays a critical and overriding function in accomplishing the state ‘s societal and economic desired aims and marks ( Zhang, 2001 ) . A capital lacking and lacking state like Pakistan can better the economic growing through its part in human resources, physical capital, transportation of engineering, advancing and heightening its trade with the remainder of the universe. The FDI with its important, conspicuous and significant impact on the volume of trade besides renders aid to incorporate the domestic economic system with the planetary economic system.

Foreign Direct Investment ( FDI ) “ FDI is defined as, An investing affecting a long-run relationship and reflecting a permanent involvement and control by a resident entity in one economic system ( foreign direct investor or parent endeavor ) in an endeavor occupant in an economic system other than that of the foreign direct investor ( FDI endeavor or affiliate endeavor or foreign affiliate ) ” ( World Investment Report, 2006 ) .

Balance of Payments ( BOP ) The balance of payment of a state is a one twelvemonth systematic record of all its economic minutess with the remainder of universe. The balance of payment history of a state is worked out on the rule of dual entry book maintaining. Each dealing is entered on the recognition and debit side of the balance sheet. Every recognition in the balance of payments is matched by a debit someplace to corroborate to the rule of dual entry book maintaining.

A state ‘s Balance of Payments ( BOP ) consists of current history, capital history and official colony history. The Foreign Direct Investment ( FDI ) influxs are reported under the capital history of BOP. The early consequence of an influx of FDI on BOP is constantly positive. The FDI influxs besides affect the BOP statement indirectly through the current history of BOP because FDI influxs have important impact on the volume of import and export of a state. Thus the FDI influx has an of import function to find the BOP history of a state.

The critical and overriding impact of FDI on the balance of payments is in-determined. It depends upon the two opposite inclinations or factors. The FDI inflow tends to increase the imports of host state because the FDI companies import capital and intermediate goods and services that are non readily available in the host state. The addition in GDP due to the influx of FDI may besides be followed by the addition in imports. All these factors cause negative impact on the BOP. This survey aims to cognize the Impact of FDI on the BOP of Pakistan.

## Literature Review

A brief reappraisal of some of the surveies related to the foreign direct investing and the balance of payment is given here under. There is a group of literature demoing the impact of FDI on exports and imports in different states ; nevertheless, in this survey, net consequence of FDI on BOP has been analyzed.

Till the mid of 1960s, most of the developing states were emphasizing on the inward looking industrialisation policy doing their BOP being reciprocally affected but during the late seventiess, this motion was inverted in the East Asiatic economic systems. Therefore increasing function of FDI in the fabrication exports of the developing state which was confirmed by Helleiner ( 1973 ) who stated that “ the beginning of an inevitable and of import tendency in the development of international trade and investing ” .

Stoneman ( 1975, as cited in Obwona, 1998 ) analyzed the relationship of FDI and the economic growing for DCs ( Developing Countries ) . He concluded that with the higher stock of capital, the foreign direct investing promotes the productiveness and at the same clip, brings betterment in the Balance of Payment.

Bhagwati ( 1978 ) indicated that the measure of FDI is the most of import in exports oriented host states and it is even more resourceful in such states. He shows that any policy which leads to equalisation of mean exchange rate on exports to mean exchange rate on imports is export-led policy and converse is the instance if it leads to disequilibrium of the two exchange rates. He discussed that the states which follow export-led growing program can get greater net income from the influx of FDI.

Tormenting ( 1981 ) studied an eclectic theory of foreign investing based on the theories of industrial organisation and location of the house. TNC developed ownership specific advantages in foreign states by internalising instead than projecting them. The most important benefit of internalisation is that it provides entree to the whole scope of TNC ‘s technological accomplishment assets including its tacit cognition. He included 67 states and divided into three groups by bunch analysis. The fact suggests that per capita income in the host state has the prima influence. It is found even if the FDI crowds out some of the local industries, it might ease the host economic system to spread out its production, by utilizing a broad scope engineerings.

Schneider and Frey ( 1985 ) analyzed the effects of FDI in 80 less underdeveloped states and concluded that the states holding higher per capita GDP had more FDI influxs and as a consequence, they had an encouraging impact on their BOP ( balance of payments ) . William More ( 1986 ) found foreign houses more export-oriented than the local Brazilian houses. Similarly, Chen ( 1983 ) found no difference in the export way in foreign houses and Malayan houses.

Shabbir and Mehmood ( 1992 ) while utilizing coincident equilibrium theoretical account explained the impact of FDI on macroeconomic stableness in Pakistan. They concluded that the FDI is straight related with the variables like GDP growing but detrimentally related with the nest eggs.

Khan, Hassan and Malik ( 1992 ) analyzed that in most of the LDC ‘s ( Less Developed Countries ) meeting a debt crisis for deficiency of capital, creates disequilibrium in the balance of payment, debt service, and macroeconomic instability and growing lacks. The survey used the informations for four old ages ( 1989-1993 ) and the instance of 30 one development states.

Tormenting ( 1993 ) indicates two intents of FDI, i.e. market-seeking FDI and efficiency-seeking FDI. The former one may speed up imports while the later may take to increase in exports. BOP consequence of FDI is unsure and indefinite depending on the intent of FDI. Colman and Nixon ( 1994 ) observed that in 1970 MNCs accounted for 15 per centum of entire LDCs ( Less Developed Countries ) fabrication exports.

Balasubramanyan, Salisu and Sapsford ( 1996 ) showed that the FDI growing of a state through triping its exports as explained by the endogenous growing theory. Fry ( 1989 ) studied the impact of FDI influx on six Asiatic economic systems ( Korea, Malaysia, Philippines, Indonesia, Singapore, and Thailand ) . He pinpointed the five ways in which the FDI affects the BOP of a state i.e. economy, investing, imports, exports and growing. He found that the FDI is perfectly and wholly linked with the economy, exports, imports and investing with the lagged response for exports.

Malik ( 1996 ) associated shortage in the Balance of Payment with the debt crisis which largely emerge, the deficiency of capital. This survey aimed at happening whether the FDI affects economic system for a short clip period or has the long permanent impact on the macroeconomic stableness of a state. It resulted into a positive nexus between FDI and economic growing.

Aitken, et. al. , ( 1997 ) stated that operation of MNCs reduces the cost of exports for domestic houses in Mexico. He indicates the factors linked with host states which manipulate the volume and nature of the minutess of the foreign affiliates these include the stage of development, size, resources, technological capablenesss, etc. These effects of FDI on a BOP of states have been examined for the first half of 1990s by the UN ( 1997 ) these states include Singapore, Malaysia, China and Thailand. The impacts were found positive for China, assorted in Malaysia, negative in Thailand and it was inconclusive due to informations job for Singapore.

Two of import inquiries harvest up sing FDI and its impact on the BOP of a state. The first relates to the footings of trade consequence of the FDI and accordingly, its consequence on the current history of Balance of Payment. Although ab initio, it is smaller because of the capital move to the host state, it might worsen in due class of clip when the return of net incomes and dividend starts to the investing state.

The 2nd consequence relates to the inflationary impact of the FDI because of the increased employment, outgos and incomes. It becomes really critical to analyse the BOP history as a whole particularly when we are detecting the effects of FDI, because every influx of capital into the state has a different consequence on the constituents of the BOP history and an ultimate impact on the BOP balance, ( Bartlett and Sumantra, 1998 ) . This might be even more deteriorating and worsening when the entire sum of investing is fixed in a state and the FDI has to replace the domestic investing.

Khan and Kim ( 1999 ) observe that the FDI influx additions imports and exports of Pakistan with a slowdown of one twelvemonth. The snap of import with regard to the FDI is positive. The coefficient of FDI is of import and indicates that a 10 per centum addition in FDI is followed by 1.8 percent addition in imports. They besides indicate positive correlativity between FDI and volume of export. The snap of export with respect to FDI is non merely encouraging and exciting but besides important. The coefficient indicates that 10 percent addition in FDI leads to 0.6 per centum addition in export.

A wide-ranging and extended survey by Bosworth and Collins ( 1999 ) provides grounds sing the consequence of capital influxs on the domestic investing in regard of 58 developing states during 1978-95. The writers differentiate among three types of influxs, ( a ) Foreign Direct Investment, ( a ) Portfolio Investment and ( degree Celsius ) Other Financial Flows ( Primarily Bank Loans ) .

Bosworth and Collins ( 1999 ) observe that an addition of a dollar in capital influxs is linked with an addition in domestic investing of about 50 per centum. ( Both capital influxs and domestic investing are expressed as per centums of gross domestic merchandise ( GDP ) . This consequence, nevertheless, makes of import and important differences among different types of influxs. The foreign direct investing appears to convey approximately near to a one-for-one addition in the domestic investing ; there is practically no seeable relationship between portfolio influxs and investing ( small or no impact ) , and the impact of loans falls between those of the other two.

Zhang ( 2001 ) believed that as the FDI can function as an engine or cogwheel of economic development through its diversified impacts on the economic system of the host state. These impacts include:

Capital formation and employment coevals because of the influx of FDI.

The FDI is likely to promote fabrication export, therefore, developing the positive nexus with the current history of the BOP.

The FDI transportations resources from the place state to the host state through displacement of managerial accomplishments, supplying chance for the skilled labour to larn about new production techniques.

The FDI generates spillover consequence and is a beginning of transportation of engineering.

Suliman ( 2005 ) has endeavored to show the consequence of FDI on the fabrication exports in MENA states. He found that there is a positive nexus between, the FDI and the fabrication exports of the MENA ( Middle East and North American ) states. He, hence, suggested that these states should concentrate near and specials attending on the improved volume of FDI as MNCs are more efficient in imports than the local houses and owing to the economic systems of graduated table and lower costs trigger manufacture exports.

Hermes and Lensink ( 2003 ) believed that a well-known and renowned fiscal system is a pre-requisite for a state so as to accrue benefit from the positive spillovers of the FDI. The established fiscal system of a state broadens the soaking up capacity of the FDI influxs. In this connexion, factors such as capacity to absorb FDI, openness to merchandise and good developed establishments, contribute a batch.

Majeed and Ahmad ( 2007 ) analyzed the relationship between the FDI and Exports every bit good their common determiners in developing states by utilizing a panel of 49 states for the period 1970-2004. The analysis that depicts both, the exports and FDI decidedly affect each other, though the consequence of exports on FDI is non really important. Therefore, there is no cogent evidence of a permutation relationship between the FDI and exports. The analysis indicates that GDP, economic growing, domestic incorporation, and exports positively affect FDI, a consequence consistent with the market-seeking behaviour of transnational corporations. On the other manus, external debt and BOP shortage have negative impacts on the FDI. The consequence of domestic investing in explicating the FDI flow is negative. The survey besides shows that the deficiency of financial inducements and drift is a hurdle and hindrances for FDI. It is besides observed that depreciation of existent exchange and industrialisation and development of communicating installations significantly the encourage exports.

Hossein ( 2008 ) found relationship between the FDI and the balance of payment of Bangladesh. He found that the FDI is positively related with both imports and exports. However, its concluding impact on the balance of payment of Bangladesh depends upon the magnitude of the consequence on any of the two variables. The FDI can potentially bring forth employment, transfers the engineering and accomplishments, enhances productiveness and promotes exports, therefore, lending towards the economic growing for the development states ( UNCTAD, 2006 ) .

Yousaf et.al, ( 2008 ) conducted a survey to the relationship between the FDI and imports and exports. He concluded that the FDI and imports are positively related to the FDI in the short tally every bit good as in the long tally but the exports were found negatively linked with the FDI in the short tally but this relation was positive in the long tally for Pakistan.

Taking the above mentioned literature of FDI and trade, it can be assorted that the FDI positively affect the BOP. However, it is imperative to cognize that how the FDI affects the imports and exports factors as the chief constituent of BOP. Surely, Pakistan is an import oriented state with a few exports. Therefore, it is hard for Pakistan to rectify its BOP, long-run and effectual policies and their executions, in this respect, can rectify the BOP of Pakistan ‘s economic system. This fact can non be derived that the FDI plays a critical function in hiking up, the export side, of the Current Account of BOP.

## Methodology

Data Beginnings and Variables, to happen out the effects of foreign direct investing influx on the degree of import and export and eventually on the balance of payment of Pakistan, clip series informations for the period of 1975-2007 is used. The informations are taken from Handbook of Statistics on Pakistan Economy ( 2005 ) of State Bank of Pakistan ( SBP ) , Planing and Development Division of Federal Bureau of Statistics and Economic Survey of Pakistan ( Various Issues ) . GDP is the existent GDP. Import and Export are taken as per centum of GDP. Relative monetary value of import and export are taken as the unit value of import and export divided by the GDP deflator. FDI is besides considered as per centum of GDP. Exchange rate for import and export are calculated as unit value of import and export multiplied by mean exchange rate whole divided by GDP deflator severally. In this research the informations are taken on the footing of 1999-2000 as a basal twelvemonth.

## Empirical Model

The functional equations specified to this research are based on Khan and Kim ( 1999 ) theoretical account which is followed by Yousaf et. Al. ( 2008 ) . The additive preparation of import and export are given as under.

Real Demand for Import Model

lnM = b0 + b1lnGDP + b2lnPM + b3lnERM + b4lnFDI + a‚¬

Real Demand for Export Model

lnX = b0 + b1lnGDP + b2lnPX + b3lnERX + b4 lnFDI + a‚¬

Where

M = Real import

X = Real export

GDP = Gross domestic merchandise

PM = Relative monetary value of import

ERM = Exchange rate for import

FDI = Foreign direct investing

PX = Relative monetary value of export

ERX = Exchange rate for export

a‚¬ = Error term

ln = Natural log

Bi = Percentage alteration in the dependant variable owing to the per centum alteration in

the independent variable I = 1, 2, 3 and 4 in the several equations

Exchange rate is an independent variable in the import and export theoretical account that is non used in Yousaf at.el. ( 2008 ) research. But in this research it is included as an independent variable because of its of import impact on the existent demand for import and export and eventually on the BOP ( Balance of Payment ) . When we consider Marshal Lerner status, the exchange rate alterations have great impact to find the balance of payment relation. When covering with clip series informations, it frequently shows the belongings of non-stationary in degree. It is necessary to measure whether the series is stationary or non. The aggression on the footing of non-stationary series normally provides specious consequences. We can look into stationary of a clip series through unit root trials. In this respect the Augmented Dickey Fuller ( ADF ) trial and the Phillips Perron ( PP ) trial are used.

## Empirical Findingss

To happen out the effects of foreign direct investing influx on the degree of import and export and eventually on the balance of payment of Pakistan, clip series informations for the period of 1975-2007 is used. Using VAR based Johnson co-integration techniques and vector mistake rectification theoretical account that explains the long tally relationship and short tally kineticss of FDI and its effects on BOP. After proving the stationarity of the variable by utilizing ADF and PP trial, Johansen co-integration trial is was used for farther analysis.

## Choice of the Most Appropriate Lag for Import Model

Schwarz Bayesian standard and Akaike information standard are described in the following tabular array to choose the most appropriate slowdown and to gauge the carbon monoxide integrating trial followed by VECM for import theoretical account. In this theoretical account slowdown ( K ) = 3 is selected as the order of VAR on the footing of SBC, to avoid over parameterization of clip series. Among all the possible slowdown, slowdown ( K ) = 3 is the most appropriate slowdown because within this lag the value of SBC is minimal. The variables which is included in unrestricted VAR import theoretical account are lnM, lnPM, lnGDP, ln ERM, ln FDI

## VAR Order for the Import Model

## exogenic variables ( Constant )

## Order

## AIC*

## SBC**

3

-2.0533

-1.2305

2

-1.5488

-1.0610

1

-1.5194

-1.2755

0

2.6511

2.7355

*AIC = Akaike Information Criterion **SBC = Schwarz Bayesian Criteria

## Choice of the Most Appropriate Lag for Export Model

Schwarz Baysian standard and Akaike information standard are besides described in the following tabular array to choose the most suited slowdown and to gauge the carbon monoxide integrating trial followed by VECM for export equation here slowdown ( K ) = 1 is selected as the order of VAR on the footing of SBC. List of variables included in the unrestricted VAR export theoretical account lnX, lnPX, lnGDP, lnERX, lnFDI

To avoid over parameterization of clip series. Among all the possible slowdown, slowdown ( K ) = 1 is the most appropriate slowdown because within this lag the value of SBC is minimal.

## Table 6.6 – Volt-ampere Order for the Export Model

## exogenic variables ( Constant )

## Order

## AIC*

## SBC**

3

-1.7201

-0.9893

2

-1.6216

-1.1218

1

-1.6032

-1.3238*

0

2.8190

2.9435

*AIC = Akaike Information Criterion **SBC = Schwarz Bayesian Criterion

## Johansen Co integrating Test Results for Import

On the footing of Trace statistics and eigenvalue statistics we describe the Johansen carbon monoxide integrating trials consequences. The following tabular array 5 shows the hint statistics. Trace trials indicate two carbon monoxide incorporating equations at the 0.05 degree of significance.

## Table – Trace Statistics Test for Imports: 1975-2007

## H0

## H1

## Trace Statisticss

## Critical Value at 5 %

I? = 0

I? = 1

104.981 & gt ; 68.818

I? = 1

I? = 2

50.934 & gt ; 46.856

I? = 2

I? = 3

24.826 & gt ; 28.687

Now we test the void hypothesis of I? = 1 against the alternate hypothesis of I? = 2 agencies there may be two co incorporating vectors. Harmonizing to hint statistics the void hypothesis can be rejected as the hint statistics value is 50.934 and it is greater than the critical value at 0.05 degree of significance since the critical value is 46.856.

## Table – Eigenvalue Statistics Test for Imports: 1975-2007

## H0

## H1

## Eigenvalue

## Critical Value at 5 %

I? = 0

I? = 1

53.037 & gt ; 32.876

I? = 1

I? = 2

25.117 & lt ; 26.583

I? = 2

I? = 3

16.592 & lt ; 20.130

Harmonizing to Eigenvalue statistics trial as the maximal Eigenvalue is smaller than the critical value at 0.05 degree of significance ( 25.117 & lt ; 26.583 severally ) so the void hypothesis of I? = 1 can non be rejected utilizing the maximal Eigenvalue statistics.

The following measure is to prove the void hypothesis of I? = 2 against the alternate hypothesis of I? = 3, intending there might be three co incorporating vectors. Here the void hypothesis can non be rejected utilizing either the hint statistics or the maximal Eigen value statistics as in instance of hint statistics the hint statistics value is smaller than the critical value at 0.05 degree of significance ( 24.826 & lt ; 28.687 severally ) and the void hypothesis can non be rejected. In instance of Eigen value statistics the maximal Eigen value is smaller than the critical value ( 16.592 & lt ; 20.130 severally ) at 0.05 degree of significance and once more the void hypothesis can non be rejected.

In the visible radiation of above analysis, it is concluded that harmonizing to hint statistics test two carbon monoxide integration equations are possible at 0.05 degree of significance and maximal Eigen value statistics indicates one carbon monoxide incorporating equation at 0.05 degree of significance.

## Johnson Co integrating Results for Export

In the undermentioned table 5.6 we describe the Johansson carbon monoxide integrating trials consequences on the footing of hint statistics and maximal Eigen value statistics to happen out the long tally or equilibrium relationship among the clip series.

## Table 6.9 – Trace Statisticss for Export 1975-2007

## H0

## H1

## Trace Statisticss

## Critical Value at 5 %

I? = 0

I? = 1

103.547 & gt ; 68.718

I? = 1

I? = 2

63.080 & gt ; 45.856

I? = 2

I? = 3

29.407 & gt ; 28.786

I? = 3

I? = 4

8.646 & lt ; 14.484

The void hypothesis of I? = 1, against the alternate hypothesis of I? = 2, means there might be 2 co incorporating vectors. Harmonizing to hint statistics the void hypothesis is rejected as the hint statistics value is greater than the critical value, since the hint statistics value is calculated as 63.080 and critical value is 45.856 at 0.05 degree of significance.

In the following measure we are traveling to prove the void hypothesis of I? = 2, against the alternate hypothesis of I? = 3, intending there might be 3 co incorporating vectors. Harmonizing to hint statistics the void hypothesis can be rejected as the hint statistics value is 29.407 and it is greater than the critical value, calculated as 28.786. In instance of hint statistics test the hint statistics value is non greater than the corresponding critical value ( 8.646 & lt ; 14.484 severally ) at 0.05 degree of significance.

## Eigen value Statistics for Export 1975-2007

## H0

## H1

## Eigen Value

## Critical Value at 5 %

I? = 0

I? = 1

39.556 & gt ; 32.866

I? = 1

I? = 2

32.672 & gt ; 26.564

I? = 2

I? = 3

19.750 & lt ; 20.130

I? = 3

I? = 4

8.445 & lt ; 13.263

Harmonizing to maximal Eigen value statistics, as the maximal Eigen value is than the critical value at 0.05 degree of significance and the void hypothesis is rejected, since the maximal Eigen value is calculated as 32.672 and critical value is 26.564 at 0.05 degree of significance.

The void hypothesis can non be rejected as the maximal Eigen value statistics is non greater than the corresponding critical value at 0.05 degree of significance, since the maximal Eigen value statistics is calculated as 19.750 and the critical value is 20.130.

The following measure is to prove the void hypothesis of I? = 3 against the alternate hypothesis of I? = 4, intending there might be 4 co incorporating vectors. Here the void hypothesis can non be rejected utilizing either the hint statistics or maximal Eigen value statistics. In instance of upper limit Eigen value statistics the maximal Eigen value is smaller than the corresponding critical value ( 8.445 & lt ; 13.26 severally ) at 0.05 degree of significance. Hence the void hypothesis can non be rejected harmonizing to either hint statistics or maximal Eigen value statistics.

The above tabular array shows the hint and Eigen value statistics trace statistics-test indicates three carbon monoxides incorporating equations at 0.05 degree of significance. Maximum Eigen value statistics indicates two carbon monoxide incorporating equation at 0.05 degree of significance.

The void hypothesis of I? = 0, agencies there is no carbon monoxide incorporating vector, is tested against the alternate hypothesis of I? = 1, Harmonizing to hint statistics, the void hypothesis can be rejected as the hint statistics value is greater than the critical value ( 103.547 & gt ; 68.718 severally ) at 0.05 degree of significance. Harmonizing to maximal Eigen value statistics, the void hypothesis can be rejected as the maximal Eigen value statistics is greater than critical value ( 39.566 & gt ; 32.866 severally ) at 0.05 degree of significance.

## ECM for Real Demand for Import ( Long Run Analysis ) :

In the undermentioned equation, the Johnson normalized estimations for the existent demand for import is calculated. The coefficients, in this equations show the estimations of long tally snap of existent demand for import with regard to comparative monetary value of import, existent GDP, exchange rate for import and foreign direct investing.

## Real Demand for Import Equation

LnM = 36.076 + 7.420 LnPM – 2.527 LnGDP – 2.20 LnERM + 0.513 LnFDI

( -6.137 ) ( 2.303 ) ( 3.151 ) ( -2.892 )

As it is described in the import equation that the long tally coefficients of all the independent variables are important. The long tally snap of import with regard to FDI is important and besides has the expected positive mark the magnitude of the coefficient of FDI is 0.513, intending one per centum addition in FDI leads to 0.513 per centum addition in imports. These consequences are comparable with Khan and Kim ( 1999 ) where they found the long tally snap of imports for FDI was 0.18. The coefficients of FDI in both researches have the same positive mark but the magnitudes of the coefficients are different. This difference in magnitudes might be due to difference continuance of day of the month periods.

In this research the long tally snap of import with regard of FDI is 0.513. this consequences is besides consistent with Yousaf et Al. ( 2006 ) where they found that the coefficient of FDI in the long tally was 0.522 intending one per centum addition in FDI was followed by 0.52 percent addition in imports. The coefficient of FDI has the same positive mark with that of Yousaf et Al. ( 2007 ) but the magnitude of the coefficients is different due to some different independent variables.

## Short Run Analysis:

The following tabular array shows the ECM estimations for the existent demand for import.

## Table – Electronic countermeasures Estimates for Imports

## The ECM estimations for existent demand for imports

## Repressors

## Short tally

## Long tally

Count Equation 1

-0.140 ( -1.247 )

M a?†lnM ( -1 )

0.112 ( .572 )

1.000

PM a?†lnPM ( -1 )

-0.385 ( -0.354 )

7.420 ( -6.137 )

GDP a?†lnGDP ( -1 )

0.612 ( 0.734 )

-2.527 ( 2.303 ) *

ERM a?†lnERM ( -1 )

0.146 ( 0.152 )

-2.20 ( 3.151 ) *

FDI a?†lnFDI ( -1 )

-0.133 ( -2.022 ) *

.514 ( -2.892 ) *

C

.192 ( 2.057 ) *

36.076

*Indicates Significant at 5 % degree of significance D Indicates difference of the variable used

## Table ( a ) – Electronic countermeasures Estimates for Imports

## Repressors

## Short tally

## Long tally

a?†lnM ( -2 )

-0.240 ( -1.312 ) *

1.000

a?†lnM ( -3 )

-0.067 ( -0.316 )

a?†lnPM ( -2 )

1.328 ( 0.658 )

7.420 ( -6.137 )

a?†lnPM ( -3 )

-1.223 ( -0.767 )

a?†lnGDP ( -2 )

-1.338 ( -1.019 )

-2.527 ( 2.303 ) *

a?†lnGDP ( -3 )

1.102 ( 0.746 )

a?†lnERM ( -2 )

-1.458 ( -1.121 )

-2.20 ( 3.151 ) *

a?†lnERM ( -3 )

1.014 ( 0.703 )

a?†lnFDI ( -2 )

-0.068 ( -1.137 )

.513 ( -2.892 ) *

a?†lnFDI ( -3 )

-0.011 ( -0.274 )

*Indicates Significant at 5 % degree of significance D Indicates difference of the variable used

The consequences described in the tabular array show that existent demand for import depends upon comparative monetary value of import, existent GDP, exchange rate for import and foreign direct investing.

The short tally snap of import with regard to comparative monetary value of import ( PM ) , existent GDP, exchange rate for import is undistinguished in all the slowdown. It is described in the tabular array that the short tally snap of import for FDI is important in the first slowdown at 5 percent degree of significance and it is besides important in the long tally at the some degree of significance ( .05 ) . The long tally coefficient of FDI is calculated as 0.514 ( -2.892 ) .

The coefficient of the mistake correlativity term ( EC ) shows negative mark and this negative mark means that there is a inclination from short term fluctuations to equilibrium in the long tally. The coefficient of ECM 0.150 indicate the divergence of existent demand for import from the long tally equilibrium is corrected by 0.15 per centum in the current period.

The following tabular array 6.12 shows the appraisal of the ECM which have five equations. The accommodation coefficient associated with each variable is different from nothing.

## Table 6.12 – Electronic countermeasures Coefficients for Imports

## D ( LnM )

## D ( LnPM )

## D ( LnGDP )

## D ( LnERM )

## D ( LnFDI )

-0.150

0.304

0.031

0.258

-0.060

( -1.347 )

( 4.047 )

( 0.328 )

( 2.162 )

( -0.112 )

Harmonizing to the tabular array the accommodation coefficient associated with D ( LnM ) is negative, but it is undistinguished, intending “ No carbon monoxide integrating ” hypothesis can non be rejected. The accommodation coefficient associated with D ( LnPM ) , D ( LnERM ) are non merely different from nothing but besides important ( t-statistics = 4.047, 2.162 severally ) and this is sufficient to reject any “ No carbon monoxide integrating ” hypothesis. However the accommodation coefficients of D ( LnGDP ) and D ( LnFDI ) equations are non important ( t-statistics = 0.328, 0.112 severally ) .

## ECM for Real Export ( Long Run Analysis ) :

In the undermentioned equation, the Johnson normalized estimations for the existent export is described. In this equation the coefficients are demoing the estimations of long tally snaps of existent exports with regard to comparative monetary value of exports, existent GDP, exchange rate for export and foreign direct investing.

## Real Export Equation

LnX = 192.23 + 40.680 LnPX – 12.446 LnGDP – 9.55 LnERX + 4.668 LnFDI

( -6.539 ) ( 2.178 ) ( 2.265 ) ( -2.844 )

The long tally snap of export for all the explanatory variables is important as it is described in the export equation. The snap of export with regard to foreign direct investing is non merely important but besides demoing the expected positive mark. The consequences show that one per centum addition in FDI is followed by 4.66 percent addition in export. This consequence is consistent with Khan and Kim ( 1999 ) . They found that the coefficient of FDI was.07 ; intending one per centum addition in FDI was followed by 0.7 percent addition in export. In this research the coefficient of FDI has the same mark with that of Khan and Kim but the magnitude of the coefficient is different due to different continuance of informations periods.

In this research the consequences about the long tally snap of export with regard to FDI are besides consistent with Yousaf et Al. ( 2006 ) , where the writers found that the coefficient of FDI in the long tally was 1.623, intending one per centum addition in FDI was followed by 1.62 percent addition in exports. Coefficients have same mark with different magnitudes the difference in magnitudes might be due to some different independent variables.

## Short Run Analysis:

The following tabular array describes the ECM estimations for existent exports.

## Table – The Error Correction Model Estimates for Real Export

## Repressors

## Short tally

## Long tally

Changeless

0.1023 ( 1.680 ) **

192.23

a?†LnX1

*0.2051 ( -1.1023 )

1.000

a?†LnPX1

-0.0412 ( -0.038 )

40.680 ( -6.539 ) *

a?†LnGDP1

-0.0417 ( -0.049 )

-12.446 ( 2.178 ) *

a?†LnERX1

0.1322 ( 0.1204 )

-19565 ( 2.265 ) *

a?†LnFDI1

-0.0815 ( -1.754 ) **

4.668 ( -2.844 ) *

Electronic countermeasures

-0.0002

* indicate important at the 5 % degree of significance.

** indicate important at 10 % degree of significance, a?† indicates the first difference of the variables used.

The consequences in the tabular array show that existent export is dependent on the comparative monetary value of export, existent GDP, exchange rate for export and foreign direct investing. The short tally snap of export for comparative monetary value of export, existent GDP and exchange rate for export is non important and the estimated values are as -0.0412 and 40.680 comparative monetary values of export, -0.0412 and -12.446 for existent GDP and 0.1322 and 10.23 for exchange rate in the short tally and long tally severally. As it is described in the tabular array that snap of export with regard of FDI is important in the long tally and in the short tally every bit good co-efficient of FDI are -0.0815 in the short tally and 4.668 in the long tally, intending one per centum addition in FDI leads to 0.081 per centum addition in export in the short tally and 4.66 per centum addition in export in the long tally.

The following table nowadayss postpone the appraisal of the ECM for export which contains five equations. The accommodation coefficient associated with each variable is different from nothing.

## Table 6.14 – Electronic countermeasures Coefficients for Export

## D ( LnX )

## D ( LnPX )

## D ( LnGDP )

## D ( LnERX )

## D ( LnFDI )

-.0001

.014

.002

.013

.086

( .018 )

( 1.89 )

( .732 )

( 1.04 )

( 3.642 )

Figures in parentheses are t-statistics

Harmonizing to the tabular array the accommodation coefficient associated with D ( LnX ) equation is non important ( t statistics = .018 ) intending “ No carbon monoxide integrating ” hypothesis can non be rejected. However, the accommodation coefficients associated with the variables D ( LnPx ) , D ( LnERX ) and D ( LnFDI ) are important ( t-statistics = 1.89, 1.04, 3.642 severally ) and this is sufficient to reject any “ No carbon monoxide integrating ” hypothesis.

In this research the following tabular array describes the Granger Causality trial consequences for the existent demand for import theoretical account.

## Table – Granger Causality Test Results for Import

## Direction

## Probability Value

GDP ?PM

.004 & lt ; .05

ERM ?PM

.0002 & lt ; 0.5

FDI ?PM

.006 & lt ; 0.5

FDI ?GDP

0.21 & lt ; 0.5

PM ?ERM

.019 & lt ; .05

While looking at the tabular array 5.11 PM is being caused by GDP, ERM and FDI. While ERM is caused by PM while GDP is caused by FDI. There is bidirectional causality between PM and ERM. As the both variables are caused by each other. The void hypothesis of ERM does non Granger cause PM is rejected at 5 percent degree of significance and the void hypothesis of PM does non Granger do ERM is rejected at 5 per centum of significance.

## Granger Causality Test for Real Export

While looking at the following tabular array, GDP is impacting PX, while GDP is being affected by X and FDI. Whereas FDI is being affected by PX.

## Table – Granger Causality Test Results for Export

## Direction

## Probability Value

GDP ?PX

0.210 & lt ; 0.5

Ten ?GDP

.0170 & lt ; .05

FDI ?GDP

.0056 & lt ; 0.5

PX ?FDI

0.271 & lt ; 0.5

## CUSUM and CUSUMSQ Test for Real Demand for Import

The void hypothesis of stable coefficients of all the variables can non be rejected when the secret plans of CUSUM and CUSUMSQ trial do non traverse the critical value line of 5 percent degree of significance.

## CUSUM and CUSUMSQ Test for Real Export

The undermentioned figure indicate that the secret plan of SUSUMSQ trial, cross one of parallel lines. It shows the structural instability get downing from 1983 to 1996. Here the void hypothesis of stable coefficients of the variables is rejected bespeaking the unstable long tally relationship the variables.

## Decision

In order to analyse the net impact of FDI on Pakistan ‘s balance of payment, we anticipate the import and export maps for Pakistan individually. The estimated equation of import is:

LnM = 36.07 + 7.420 LnPM – 2.52 LnGDP – 2.20 LnERM + .513 LnFDI

( -6.137 ) ( 2.303 ) ( 3.151 ) ( -2.892 )

The consequences of the estimated demand for import map advocator that there is a positive impact of FDI on the demand for import. The snap of import with regard to FDI is non merely positive but besides important ( t-statistics = 2.892 ) . The coefficient of FDI ( 0.513 ) indicates that one per centum addition in FDI is followed by 0.513 percent addition in the existent demand for import. Similarly, we estimated a existent export map, the estimated export equation is

LnX = 192.23 + 40.680LnPX – 12.446LnGDP – 9.55LnERX + 4.66 LnFDI

( -6.539 ) ( 2.178 ) ( 2.265 ) ( 2.844 )

The consequences of the estimated export map show that the coefficient of FDI has estimated positive mark significance, positive relation between, FDI and existent exports of the state. It is statistically important ( t-statistics = 2.844 ) . The importance of the coefficient of FDI ( 4.66 ) indicates the snap of export with regard to FDI. Besides suggests that one per centum addition in FDI will take to 4.66 per centum addition in the export of state.

The above consequences show that FDI contributes positively so as to increase the imports and exports. The magnitudes of the two forces will find and decide the net impact on the trade balance. On the other manus, the first unit of ammunition consequence of FDI on the balance of payment is constantly positive as the FDI influx is reported under the capital history of the state ‘s BOP statement.

In this research, although, the FDI leads to increase import and export wholly, but the magnitude of the snap of export with regard to FDI is much greater than that of the snap of import for FDI ( 4.66 & gt ; .513 severally ) . The FDI influxs have a greater positive consequence through increasing exports than making negative consequence by increasing imports. Therefore, there is a net positive impact on the BOP of FDI in Pakistan which can raise the criterion of life ( existent per capita income ) of people.