RELEVANCE OF FDI FOR SUSTAINABLE

DEVELOPMENT IN CASE OF PAKISTAN

ABSTRACT:

In recent years role of foreign direct investment in development process has well
been recognized specifically in low and middle income countries. But such
phenomenon has also been observed to hurt environmental aspects and poverty
status of the host countries because MNCs/TNCs have their own interests. In
such a scenario it is suggested to focus on sustainable development instead of
development. Sustainable Development has three major components i.e. growth,
poverty and environment, therefore, in this studythese three components have
been used as representative of sustainable development.For the purpose of
investigation secondary data from 1980 to 2014is used in a framework of time
series analysis. ARDL bound test approach has been used to determine the role
of foreign direct investment in sustainable development and Johansen
cointegration approach has been used to trace causal connection between the
two. After having econometric correlational analysis, this study concludes that
foreign direct investment has no relevance for sustainable development of
Pakistan. In line with international evidence this study also anticipates non-
relevance of foreign direct investment with sustainable development on account of
non-economic factors i.e. administrative, social and institutional set up of
Pakistan. Past evidence in this regard suggests that future prospects for foreign
direct investment in the perspective of CPEC needs special care and attention of
concerned corners so that it could be proved fruitful.

Keywords: FDI, Sustainable Development, Cointegration, Causality

1. Introduction
Sustainable Development (SD) is goal of the day because future
generations could not be deprived of the niceties just because that generation of the day
needs development. Hence it is necessary to travel on a development trajectory that
facilitates all the generations and resources may sustain for all. For the last several
decades most of the nations among developing countries are competing for foreign direct
investment (FDI) so as to get the status of ‘developed nation’ without considering its side
effects. It is observed internationally that FDI is responsible for environmental
degradation on account of MNCs operations in developing countries (WWF, 2000). Even
it is established universally that FDI is a positive correlate of economic growth but
whether the economic growth itself is sufficient to be translated into the life of masses or
not? No, not necessarily so. Major role of FDI for poverty reduction depends upon
attributes of developing world e.g. socio-economic structure of FDI recipient country
(Mayne, 1997). In case of weak institutions, poor state of policy implementation, slower
speed of employment generation with low level of economic activities and collapsing
state of social structure, FDI may accelerate the pace of growth but is not able to reduce
poverty and inequality, hence no development. On this behalf certain questions arises on
FDI for SD in case of developing countries; firstly how FDI effects economic growth,
secondly how FDI works for environment, and what is the relationship of FDI with
poverty and inequality. Enhancement of growth with environmental degradation and
increased poverty status could not be termed as sustainable development. Therefore,
need of developing countries is sustainability and not alone development.
Recently, Pakistan is going to indulge in construction of China Pakistan
Economic Corridor (CPEC) which will be a way forward for FDI in Pakistan not only
from China including CPEC investments but also from all over the world as a multiplier
effect of CPEC. Then, it is the time to look behind for the way forward. If the impacts of
FDI in Pakistan economic development are not moving toward sustainable path, then, it
is necessary to make adequate arrangements in social, economic, institutional and
legislative sphere so as to manage coming boom in FDI.
In these circumstances, this study specifically takes into consideration the
role of FDI for sustainable development in Pakistan economy in the last several decades.
For this purpose this study attempts to explore relationship and to trace causality between
FDI and three major components of SD i.e. growth, environment and poverty. It
comprises of five different sections i.e. Introduction, Literature Survey, Data and
Methodology, Results & Discussions and then Conclusions.
2. Literature Survey
Chung (2014) observed strongly that FDI proliferated and strengthened in
case of industries which cause harmful effects to host countries’ environment. Beatrice
(2013) argued that in poorer European Union (EU) countries higher level of FDI was
positively correlated with sustainable growth but was not able to enhance productivity,
competitiveness, and economic development.Kneller and Pisu (2007) found spillover
effects of FDI in industrial development and export promotion of UK manufacturing
industries.Narula and Dunning (2000) specified competitive environment both for multi-
national enterprises (MNEs) and newly industrialized countries (NICs) in globalized
world and mentioned the need for enriched economic horizon to attain sustainable
growth. Then Narula and Dunning (2009 and 2010) again revisited this idea and
explained that externalities were attached with MNEs investment and the investment was
not necessarily helped in development process of host countries. In the perspective of
socio-economic institutional set up of host country, her keen interest is required to choose
right investment for her.In a panel data study across provinces of ItalyPazienza et al
(2011) investigated the linkage of FDI with environmental sustainability for a
metropolitan strategic planning process. The study emphasized that modifications of
policies across provinces were proved more efficient in this relationship. Zaman et al
(2011) explored macroeconomic effects of FDI on Romanian economy and discussed
mixed and constructive results but described its importance for industrial sector.Zeng and
Eastin (2012) observed that FDI helped to improve environmental quality of the host
country on account of preventive measures adopted by firms receiving FDI and this also
led to increase preventive behavior of other non-FDI firms in competitive circumstances.
Voica et al (2015) attempted to explore the link between FDI and SD and found several
links to attain SDGs via these investments. The study also discovered importance of FDI
specifically for environmental projects to improve greenhouse effects along with
promoting social and economic goals. UNCTAD (2010) mentioned the challenges of
right policy balance, critical interface between investment and development and
coherence between national and international perspective in FDI investment. Even a
favouring impact of poverty was discovered by Gohou and Soumare (2012) in Africa but
impact was higher in poor regions as compare to wealthier regions and similarly
significance of impact was different for different regions. Evidence from ASEAN region
favour the impact of FDI on poverty reduction through both directions i.e. direct and
indirect via growth (Jalilian and Weiss, 2002). Aaron (1999) pointed out that poverty
reduction itself is a multidimensional process, hence, to probe poverty reduction process
by single route e.g. growth, FDI etc. would provide ambiguous results. It is suggested
that while taking into consideration the issue of poverty reduction at macro level,
multidimensional framework should be explored for clarity of conclusions drawn.Ucal
(2014) traced the relationship between FDI and poverty within developing economies and
found significant positive impact of FDI for poverty reduction. Klien et al (2001)
presented some preconditions for successful implementation of FDI to reduce poverty
e.g. attractive environment, competitive market and plausible regulatory system.
So far as economy of Pakistan is concerned no certain evidence is
available which comprehensively explores the relationship between FDI and SD and if
such evidence is available that is either limited or just focus over different components of
SD. This study analyzed some of the evidence on the topic so as to move forward in this
direction. Trends, determinants and analysis of FDI related to Pakistan economy were
discussed by Shaheen (2001), Akhtar (2000) and MuqadasUllah and Ayaz (2015). It was
recognized that if Pakistan economy wanted to gain fruits of FDI then attention would
have been focused on indigenous factors e.g. domestic investment, sectoral linkages,
industrial value addition, Islamic mode of absorption etc.Suleman (2009), Iqbal et al
(2014), Le and Attaullah (2002), Zaman et al (2012), Raza et al (2012) and Najia et al
(2013) covered macroeconomic indicators of Pakistan within the ambit of FDI and in a
perspective of closed economic issues. Overall these studies reached to the same
conclusion that impact of FDI on performance of Pakistan economy would not be proved
beneficial unless improvement in indigenous investment, human capital formation,
entrepreneurship along with socio-economic institutional and cultural setups.Performance
related to FDI and open economic issues of Pakistan economy were captured byHafeez-
ur-Rehman et al (2010) and Aleemi et al (2015). The studies observed positive impact of
FDI on real exchange rate and export promotion of Pakistan economy.
3. Data and Methodology
 Question arises at the start of analysis is what measure for SD should have
been used in this study. It come to surface after evaluating indicators of sustainable
development that several measures have been used for this purpose i.e. Living Planning
Index (LPI), Ecological Footprint (EF), City Development Index (CDI), Human
Development Index (HDI), Genuine Saving Index (GSI), and Environmental Adjusted
Domestic Product etc. These indices along with other renowned indices are failed on
scientific grounds so as to make policy recommendations (Bohringer and Jochem, 2007).
Hardi and Juanita (2000) also stressed the need for comprehensive measure of
sustainability that could be measurable and verifiable.
On this behalf this study analyzes the impact of FDI on SD through main
components of SD i.e. growth, environment and poverty. Here three different models are
used to explore the determinants of economic growth, environmental degradation and
poverty in Pakistan for the purpose of finding out the role of FDI therein. Bound test
technique for cointegration among the variables of these three models is used along with
finding out the long-run and short-run relationships. Thereafter so as to find out the
causal connection between FDI and the components of FDI a separate model is exploited
wherein first of all cointegration is assessed and then using the Wald Test methodology
causality of growth, environmental degradation and poverty is estimated specifically with
FDI.Atime series framework is utilized for analysis purpose and data is mostly extracted
from World Development Indicators along with using data sources provided by
government of Pakistan i.e. Economic Surveys and Statistical Year Books for various
years. A time span of 35 years from 1940 to 2014 is analyzed here to point out the role of
FDI in SD of Pakistan economy.
3.1 Role of FDI in SD: ARDL Approach
Models used for determining role of FDI in three components of SD i.e.
growth model, environmental degradation model and poverty model are analyzed on
behalf of autoregressive distributed lag (ARDL) methodology.ARDL bounds test
approach is based on OLS estimation of a conditional unrestricted error correction model
for cointegration analysis developed by Pesaran et al (2001). The coefficients of ARDL
will show a long run equilibrium relationship while error correction model (ECM)
integrates short run dynamics with long run equilibrium. This technique has several
advantages such as it can handle small sample easily. This test can also apply in case
ofdifferent order of integration among variables of the model. It can also be used to
include dummy variables in the model. This method also allows including different lags
for each variable, while in vector autoregressive (VAR) methodology the order of lag is
same for all the variables. So ARDL approach is able to develop a long run and short run
relationship.
Generalized equations used in this analysis are explained as under:
p
∆ ln ( Y )t =α 0 + ∑ ∑ α i ∆ ln( X i)t −1+ ∑ γ i ln ( X i) t−1 +v i [1]
i=1
 In equation [1], Y shows dependent variable, X shows independent
variable, α i represents the short run dynamics of the model while parameters γ i
represents long run relationship. The null hypothesis is

H0:
γ 1=γ 2=γ 3 =γ 4 .. . .. ..=0 ,and
H1:
γ 1≠γ 2≠γ 3 ≠γ 4 .. . .. ..≠0 {alternative hypothesis}

The rejection of H0 will confirm the existence of conitegration. In case

that cointegration exists,analysis moves to second step to find out long run relationship
by estimating the following equation:
p
ln ( Y )t =α 0+ ∑ ∑ α i ln( X i )t−1 +ui [2]
i=1

After having found long run relationship,analysis moves to third step

where estimationof ECM shows speed of adjustment back to long run equilibrium after
short run disequilibrium. ECM model is a category of multiple time series model that
directly estimates the speeds at which a dependent variable returns to equilibrium after a
change in an independent variable. The cointegration analysis has only the long run
property of the model and does not deal with short run dynamics explicitly. ECM
modeling equation is given as under:
p
ln ( Y )t =α 0+ ∑ ∑ α i ∆ ln(X i )t−1 +ui [3]
i=1

3.2 Causality of FDI with SD: Wald Test

In a stationary time series basic properties do not change over time, while
anon-stationary time series has some sort of upward or downward trend. Most of the
economic variables exhibit a non-stationary trend such as real GDP and international
trade balances etc. If variables are non-stationary then it will inflate R 2 andt-score and
regression is known as spurious regression. If a time series has a unit root, the first
difference of such time series will be stationary. The augmented Dickey-Fuller (ADF)
unit root test (Dickey and Fuller, 1981) is used to examine the stationarity of the data set.
As Engle and Granger (1987) pointed out, only variables with the same order of
integration could be tested for cointegration. Therefore, variables are examined for
cointegration and only variables with the same order of integration can be tested for their
cointegration. A standard test – Johansen cointegration test is used to check the long-run
movement of the variables (Johansen 1988; Johansen 1991). The test is based on the
maximum likelihood estimation of the K-dimensional vector autoregressive (VAR) of
order p and the Trace (Tr) eigenvalue statistic and Maximum (L-max) eigenvalue statistic
(Johansen 1988; Johansen and Juselius 1990) are used for cointegration. If trace
eigenvalue test and maximum eignevalue test yield different results, the results of the
maximum eigenvalue test should be used because the power of the maximum eigenvalue
test is considered greater than the power of the trace eigenvalue test (Johansen and
Juselius 1990). Short-run causality is tested by Granger causality developed by Toda and
Yamamoto (1995). The advantage of using Toda and Yamamoto’s technique of testing for
Granger causality has some great advantages. Toda and Yamamoto (1995) proposed a
simple procedure requiring the estimation of VAR, the Wald statics is valid regardless
whether a time series is cointegrated or not. In this method we first set the optimal lag
from VAR system then for Toda and Yamamoto technique to check causality, the optimal
lag becomes (k+d) where d= maximum order of integration while k=optimal lag
determined by VAR. The Wald statics will be asymptotically distributed chi-square (χ2),
with degree of freedom equal to the number of “zero restrictions”, irrespective of I(0),
I(1), or I(2).
The variables to be used in the analysis phase of the study are mentioned
in Table: 1 along with the applying Dickey Fuller Unit Root test to find out the order of
integration so that it may be easy to select an appropriate technique in the ongoing
analysis.

Table: 3.1 VARIABLES AND INTEGRATION ORDER

Description of Variable Name Level First I(O
Gross Domestic Product LGDP - -6.282994 I(1)
Foreign Direct Investment LFDI -2,243
Difference
-4.8791
)
I(1)
3.67469
CO2 Emission LCO2 -1.31 -8.639 I(1)
Poverty LPOV -2.877 -4.8699 I(1)
Labour Supply LLS -3.921 - I(0)
Gross Fixed Capital LGFC -4.054 - I(0)
Gini Coefficient LGINI -6.3565 - I(0)
Trade Openness LTRADE -3.13 -8.006 I(1)
Population LPOP -5.006 - I(1)
Literacy Rate LLR -2.765 -2.19197 I(1)
Source: Estimated by Authors, L is used for logarithm

4. Results and Discussion

Following two analyses may be proved helpful for tracing the relevance of
FDI with SD in Pakistan i.e. firstly to find out the role of FDI in three components of SD
in next three subsections and secondly to find out the causality connection of FDI with
the three major components of SD in fourth subsection below.
4.1 Role of FDI in Economic Growth of Pakistan
To empirically analyze the long run and short run relationships and
dynamic interaction among the foreign direct investment andcomponents of sustainable
development, the model has been estimated by applying ARDL bound test approach to
cointegration. For ARDL it is essential to determine optimal lag while following Akaike
information criterion and Schwarz Bayesian information criterion. After this in Table: 4.1
bound test approach has been used to analyze the cointegration among the variables of
growth model i.e. gross domestic product, gross fixed capital, labour supply, foreign
direct investment and trade-openness.

Table:4.1 BOUND TEST APPROACH FOR GROWTH MODEL

F- 95% lower bound 95% upper bound 90% lower bound 90% upper bound
Statistics value value value value
5.722317 2.26 3.48 1.9 3.01
Source: Estimated by Authors

Table: 4.2 LONG-RUN COEFFICIENTS OF GROWTH MODEL

Dependent variable is LGDP
Estimation from 1980 to 2014
Regressor Coefficients Standard error PROB
D(LGDP(-1)) 0.097 0.2242 0.668
D(LGDP(-2)) -1.440 0.1793 0.433
D(LGDP(-3)) -0.509 0.1557 0.004
D(LGCF) -0.024 0.0198 0.236
D(LFDI) 0.590 2.777 0.129
D(LLS) -0.475 0.2288 .0532
D(LLS(-1)) 0.7502 0.2235 0.003
D(LTRADE) 0.2734 1.2633 0.843
D(LTRADE(-1)) -1.418 -1.224 0.277
D(LTRADE(-2)) 3.155 1.1697 0.015
CointEq(-1) -0.3050 0.10679 0.0072
Source: Estimated by Authors

Table: 4.3SHORT-RUN COEFFICIENTS OF GROWTH MODEL

Dependent variable is GDP
Estimation from 1980 to 2014
Regressor Coefficients Standard error PROB
LGFC 0.023 0.020 0.255
LFDI 4.1415 2.2266 0.075
LLS .597783 .2352 0.021
LTRADE 0.9438 .32177 .0093
Source: Estimated by Authors
 As F-Statistics being greater than upper bound it is clear that cointegration
among the factors is existed which means that all these variables are in a long-run
relationship with each other and now it may be convenient to draw further conclusion in
the analysis.
After having found cointegration among the variables, next step is to find
out strength and direction of long run effects of determinants of economic growth as
described in above paragraph. Results of long run effects on economic growth of
Pakistan are mentioned in Table: 4.2 below.
First and second lag of growth itself are insignificant whereas third lag is
not only significant but also a negative relationship with growth of current year. Gross
fixed capital and foreign direct investment areinsignificant, however, the relationship of
foreign direct investment is evinced to be positive in line with hypothesis that foreign
direct investment has positive effects on growth.
Current value of labour supply and its lag value for one year are shown to
be significant and current value is in negative relationship but lagged value is in positive
relationship which means productivity of labour force in Pakistan took one year to
provide fruits in growth process. Trade-openness is only significant for second lag and
has a positive sign which points out that openness affects economic growth after a span of
two years in case of Pakistan.Cointegration equation with lag 1 is shown to be negative
and significant which shows convergence of growth modeltowards equilibrium in the
long run.
As depicted in Table: 4.3, in the short-run foreign direct investment,
labour supply and trade-openness have positive and significant effects on economic
growth of Pakistan whereas the effect of gross fixed capital is even positive but not
statistically significant.
4.2 Role of FDI in Environmental Degradation of Pakistan
Again in Table: 4.4, it is evident that a long-run relationship is existed among
the variables of environmental degradation model because F-Statistics is more than upper
bound valuewhich showscointegration and long-run relationship.
As per Table: 4.5, first two lags of CO 2 emission are significant and have
negative sign while third lag is insignificant. Sign of trade openness is positive but
insignificant. Foreign direct investment in current year and with two lags is significant.
Current value and second lag of foreign direct investment have positive sign which shows
foreign direct investment has inverse impact on environment of Pakistan within the
perspective of CO2emission.First lag in this regard has negative sign that means earlier
environmental degradation increase then decrease and then again shows increment.
Gross domestic product, and population are also significant. Population shows a negative
impact whereas in case of gross domestic product earlier the impact on CO 2emission is
negative but then positive with one year lag. So far as long-run behavior is concerned
cointegration equation here also shows a convergence to equilibrium with adequate
speed.
In the short run the only variable which is significant and has a positive sign
is population which shows a negative impact on environment of Pakistan in short-run.
Table: 4.4BOUND TEST APPROACH FOR ENVIRONMENTAL DEGRADATION
MODEL
F- 95% lower bound 95% upper bound 90% lower bound 90% upper bound
statistics value value value value
13.473 2.26 3.48 1.9 3.01
Source: Estimated by Authors

Table:4.5LONG-RUN COEFFICIENTS OF ENVIRONMENTAL

DEGRADATION MODEL
Dependent variable is LCO2
Estimation from 1980 to 2014
Regressor Coefficients Standard error PROB
D(LCO2(-1) -9568 0.1484 0.000
D(LCO2(-2) -.9600 0.2172 0.0003
D(LCO2(-3) -.3290 0.1888 0.1001
D(TRADE) 0.0148 0.0610 0.8102
D(LFDI) 0.0408 0.0155 0.017
D(LFDI-1) -0.0408 0.0155 0.0173
D(LFDI-2) 0.030187 0.01178 0.0196
D(LGDP) 0.03179 0.0109 0.009
D(LGDP-1) -0.033573 0.011020 0.0069
D(LPOP) 0.0575 0.02949 0.0667
CointEq(-1) -0.1207 0.06123 0.0643
Source: Estimated by Authors

Table: 4.6 SHORT-RUN COEFFICIENTS OF ENVIRONMENTAL

DEGRADATION MODEL
Dependent variable is CO2
Estimation from 1980 to 2014
Regressor Coefficients Standard error PROB
LTRADE 0.1232 0.5328 .8197
LFDI 0.1482 0.08777 0.108
LGDP .59402 0.08776 0.108
LPOP 0.47676 0.11640 0.0007
Source: Estimated by Authors
4.3 Role of FDI in Poverty of Pakistan
Bound test analysis in Table: 4.7 below shows that all the determinants of
Poverty i.e. trade openness, foreign direct investment, economic growth and population
are in a relationship with Poverty because F-Statistics is greater than upper bound value.
So far as long-run and short-run effects are concerned same are visible in Table: 4.8 and
Table: 4.9 below.
In the long-run no lag value of poverty is in relationship with current
value. Growth is even rightly in a negative relationship with poverty but this evidence is
not statistically significant. Only the second and third lag of foreign direct investment is
in a significant relationship with poverty and these lag values are in a positive and
negative relationship with current value of poverty respectively. It could be inferred that
in the early stage foreign direct investment is not helpful for poverty reduction but with a
passage of three years it starts to work for poverty reduction. Literacy rate is statistical
significant and affects poverty to reduce. Only first lag of inequality is significant which
has a positive sign as per hypothesis that if the inequality is high, poverty will also be
high. Only difference between the two is that former is a relative measure and later is the
absolute measure of poverty. Convergence of poverty model to equilibrium is proved
from the negative and statistically significant sign of cointegration equation.
In the short run only inequality is statistically significant which has the
negative sign with poverty. But such a relationship could be observed in the short run
because at an earlier stage of inequality the affected person of lower class may belong to
the class lie below poverty line, hence, only severity of poverty increases and size of
poverty is not increased.
4.4 FDI and SD: A Causality Analysis Based on Johansen Cointegration
Now after having analyzedthe role of foreign direct investment in
sustainable development of Pakistan economy, now, it looks appropriate to find out that
whether causal connection runs from foreign direct investment to components of
sustainable development or from components of sustainable development to foreign
direct investment. For this purpose first of all with the help of cointegration analysis it is
necessary to point out a relationship between all these variables i.e. foreign direct
investment, growth, environmental degradation and poverty. As it is evident from Table:
3.1 that all these variables have an integration of order of I(1) which means that these
variables are stationary at first difference. In this case an appropriate technique for
cointegration will not be ARDL because pre-requisite for ARDL is that except dependent
variable all other variables should have not the same order of integration and dependent
variable should be stationary at first difference i.e. its order of integration should be I(1).
This is not the case now, therefore, in case when all of the variables of the model
including dependent and independent have the same order of integration then best
technique for cointegration will be known as Johansen Cointegration Approach. In the
tables below Johansen Approach is applied step by step on the data for this model of
foreign direct investment and sustainable development.In Table: 4.10 first of all lag
length of the model is found out with the help of Akaike Information Criteria and it is
obvious that optimal lag length for this model is given as 2.
 Table:4.7 BOUND TEST APPROACH FOR POVERTY MODEL
F- 95% lower bound 95% upper bound 90% lower bound 90% upper bound
statistics value value value value
7.546 2.26 3.48 1.9 3.01
Source: Estimated by Authors

Table:4.8LONG-RUN COEFFICIENTS OF POVERTY MODEL

Dependent variable is LPOV
Estimation from 1980 to 2014
Regressor Coefficients Standard error PROB
D(GDP) -0.1046 0.1063 0.3376
D(LFDI) 0.3148 0.1966 0.1259
D(LFDI-1) 0.1614 0.1819 0.3859
D(LFDI-2) 0.6695 0.2247 0.0077
D(LFDI-3) -0.4866 0.1645 0.0081
D(LLR) -11.123 0.9360 0.0108
D(LGINI) 0.0410 0.0453 0.3763
D(LGINI-1) 0.1029 0.0464 0.0392
CointEq(-1) -0.7614 0.1432 0.000
Source: Estimated by Authors

Table: 4.9 SHORT-RUN COEFFICIENTS OF POVERTY MODEL

Dependent variable is LPOV
Estimation from 1980 to 2014
Regressor Coefficients Standard error PROB
LGDP -137464 0.1354 0.3230
LFDI 0.1442 0.2962 0.6319
LLR 0.4056 0.2958 0.7705
LGINI -0.2302 -2.0122 0.0586
Source: Estimated by Authors
 Hence, in the further statistical analysis of the model this lag length will be
used for conducting a cointegration analysis along with exploring the causal connection
among the variables. Then, next step in Johansen Cointegration Analysis is to recognize
the optimal model selection. For this purpose results of the analysis are quoted in Table:
4.11 and it is easily captured that optimal model is mentioned as Model: 4. Therefore,
while conducting VAR analysis for cointegration specifically this model will be used for
further analysis thereof.
Next important step is to seek thecointegration among the variables
relating to model of interest as mentioned earlier. Two major analyses are used to assess
the relationship among all variables of the model i.e. trace eigenvalue and maximum
eigenvalue. Both these two statistical results are mentioned in Table : 4.12 and Table:
4.13 and as per analysis, in these two tables the cointegration is existed between foreign
direct investment and sustainable development components. Now it is the time to discuss
causality connection of foreign direct investment and the sustainable development. For
this purpose, Table: 4.14 is pasted below wherein results of Wald Test procedure are
mentioned carefully.
4.4.1 Causality from SD to FDI
As per causality analysis mentioned in Table: 4:14, when we consider
causal connection from components of SD to FDI,it is crystal clear that there exit no
causality at all. Neither component of SD causes any effect on FDI. Hence, no role of
growth, environmental degradation and poverty is found for FDI in Pakistan economy.
Apparently, it would be a surprising result but when we consider economic history of
Pakistan economy for FDI, it could be observed that among competing countries
comparatively Pakistan is less efficient in attraction of FDI. Reasons for this inefficiency
are non-economic one. Out of which most important non-economic reason is weak social
structure of Pakistan which resulted in narcotic issues of 1980s, sectarian war of 1990s
and problems of terrorism after 2000. These reasons are of importance but not the
absolute one because these are only in line with international evidence and no such
evidence is estimated in this study. This study is simply a correlational examination.
4.4.2 From FDI to SD
Now Table: 4.14 is analyzed for the purpose of finding out the causal
connection to be run from FDI to SD. On this front it is traced out that FDI has no causal
effect on growth and environmental degradation of Pakistan economy. So far as reasons
are concerned in this regard, same could be pointed out as non-satiety level of FDI on
account of non-economic reasons as discussed earlier. Non-sufficient level of FDI has no
force to start its effects profoundly on major components of macro economy and same is
the case for sustainable development. This point is also backed by the whole analysis
when we include the poverty of Pakistan in causality analysis because foreign direct
investment is found to have causal effect on poverty. Less than saturation point of FDI is
less effectual to cause SD because out of three major components of SD only one variable
has a causal connection from FDI to SD i.e. poverty in Pakistan. Non-satiety level of FDI
is not the sole reason for causal connection from FDI to SD but other reasons could also
be weak administration, corruption, misallocation of resources, social structure of
Pakistan,biasedness of MNCs toward their interests etc.
 Table: 4.10LAG LENGTH CRITERION
Lag Length AIC
0 7.85022
1 1.89177
2 1.8275*
3 1.96705
Source: Estimated by Authors

Table: 4.11OPTIMAL MODEL SELECTION

Number of cointegration Model Model Model Model Model
equations
0 1
3.0442 2
3.0442 3
2.5418 4
2.5418 5
2.3818
1 2.5102 2.5238 2.2232 1.9570* 2.1214
2 2.3443 2.4003 2.3001 2.148 2.0202
3 2.5982 2.6088 2.5522 2.340 2.2113
4 3.0863 2.9679 2.9670 2.6620 2.6620
Source: Estimated by Authors

Table: 4.12TRACE EIGENVALUE STATISTIC

Number of cointegrating Eigenvalu Trace statics 5% critical PROB
equations
None* e
0.55893 50.39318 value
47.85613 0.0283
*
At most 1 0.345032 24.19916 29.79707 0.1922
At most 2 0.219508 10.65776 15.49471 0.2334
At most 3 0.081693 2.727159 3.841466 0.0987
*
Source: Estimated by Authors

Table: 4.13 MAXIMUM EIGENVALUE STATISTIC

Number of
Maximum 5% critical
cointegrating Eigenvalue
statics value
equations
None* 0.5589 26.1940 0.0745*
At most 1 0.3450 13.5414 0.4038
At most 2 0.2195 7.9305 0.3858
At most 3 0.0816 2.7271 0.0987*
Source: Estimated by Authors
 Table: 4.14VAR GRANGER CAUSALITY/BLOCK EXOGENEITY WALD
TESTS
Dependent Variable: LFDI
Excluded Chi-sq Df Prob.
LCO2 0.413293 2 0.8133
LGDP 0.512879 2 0.7738
LPOV 0.593180 2 0.7433
Dependent Variable: LGDP
LFDI 2.696096 2 0.2597
Dependent Variable: LCO2
LFDI 3.890827 2 0.1429
Dependent Variable: LPOV
LFDI 19.93302 2 0.0000
Source: Estimated by Authors

All these reasons could be mentioned as major culprits in this regard but it
is not the claim of this study because not such evidence is empirically collected here
because scope of this research is limited to relevance whereby role and causality has been
detected for the topic to be analyzed.
5. Conclusions
Foreign direct investment has no role for economic growth of Pakistan in
the long-run but in short-urn it affects it positively. Major determinants of growth to be
recognized in this study are labour as factor of production and trade-openness but their
impact is not prompt and takes some time to be effective.On the other hand, foreign direct
investment promptly affects environment adversely in the long-run and after a bit
improvement it then affects it negatively. In case of short-run no effect of foreign direct
investment could be found out on environment of Pakistan. The major determinants of
environment degradation traced in case of Pakistan are gross domestic product and
population. Gross domestic product promptly affects environment adversely but after a
bit while it starts to work affirmatively.Again in the long-run initial role of FDI for
poverty reduction is negative but with a passage of some sufficient time it works to
reduce poverty in case of Pakistan economy. In the short-run no role of FDI is found out
in the analysis. Along with foreign direct investment other determinant is evinced to be
inequality and with the increase in equality, poverty has also been increased after some
lag, hence, an adverse role.So far as causality is concerned, the only causal connection
discovered in this study in direction from foreign direct investment to sustainable
development, is observed aspoverty.
With this perspective this study concludes in line with international
evidence that foreign direct investment has no relevance with sustainable development in
case of Pakistan economy. The reasons for this evidence could be non-economic one i.e.
administrative, social, and institutional set up of Pakistan. This study is only the initial
evidence on the basis of econometric correlation analysis and a deep analysis is
necessarily required to explore the role of non-economic reasons thereof. Finally, it is
suggested that at the starting edge of FDI flows toward Pakistan on the basis of CPEC,
keen interest and focus of the concerned corners are required while taking into
consideration the economic and non-economic factors in Pakistan so that fruits of foreign
direct investment could be achieved properly.

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