Does agricultural sector foreign direct investment promote economic growth of Pakistan? Evidence from cointegration and causality analysis

Date07 October 2019
Published date07 October 2019
AuthorAbbas Ali Chandio,Amir Ali Mirani,Rashid Usman Shar
Does agricultural sector foreign
direct investment promote
economic growth of Pakistan?
Evidence from cointegration and
causality analysis
Abbas Ali Chandio
College of Economics, Sichuan Agricultural University, Chengdu, China, and
Amir Ali Mirani and Rashid Usman Shar
College of Management, Sichuan Agricultural University, Chengdu, China
Purpose The purpose of this paper is to examine the linkage between agricultural sector foreign direct
investment (FDI) and economic growth in Pakistan over the period from 1991 to 2013.
Design/methodology/approach In this study, the stationary analysis is performed by using Phillips
Perron and DickeyFuller generalized least squares unit root tests and Johansen cointegration technique to
determine the long-run linkage among the studied variables. The robustness of long-run linkage is checked
by employing autoregressive distributed lag (ARDL) approach, dynamic ordinary least squares (DOLS), fully
modified ordinary least square method (FMOLS) and the canonical cointegration regression (CCR). The causal
linkage between the selected variables is investigated by the VECM Granger causality test.
Findings The results of the Johansen cointegration test confirmed a cointegrating association between the
variables. In addition, the results of the ARDL, DOLS, FMOLS and CCR showed that agricultural sector FDI
has a strong positive significant effect on economic growth in long run. Moreover, the findings of the present
empirical study revealed that there exists bidirectional Granger causality between the agricultural sector FDI
and economic growth in both short run and long run.
Originality/value The present empirical study filled the literature gap of applying the Granger causality
based on error-correction model to examine this relevant issue for Pakistan.
Keywords Pakistan, FDI, Economic growth, Cointegration, Granger causality
Paper type Research paper
1. Introduction
There are many factors that play a vital role in capital formation and economic growth.
These factors may vary from country to state in terms of geographical, geological, technological
progress, political and institutional structures. This study investigates the causal linkage
between foreign direct investment (FDI) in the agricultural sector and economic growth in
Pakistan over the period of 19912013. FDI inflows have been playing an important role in the
development of developing countries. Over the past few decades, developing economies have
been recipients of increased FDI inflows around the world. However, these developing
economies, such as South, East and South-East Asian countries need more capital inflows in
order to boost up their economic growth (Wang and Wang, 2015). Based on certain factors,
including the existence of well-developed basic infrastructure, the availability of advanced
technology, the expansion of export markets and the growth of employment rates have been
assessed the economic growth of developing countries. FDI brings more extra benefits, for
instance, management skills and technological know-how (Broude, 2010; Djokoto et al.,2014;
Latief and Lefen, 2018; Lipsey, 2000; Meyer and Sinani, 2009). As a result, many developing
economies are taking steps to increase FDI inflows. For foreign investors, developing countries
offer profitable income-generating opportunities; for developing countries themselves, FDI is an
World Journal of Science,
Technology and Sustainable
Vol. 16 No. 4, 2019
pp. 196-207
© Emerald PublishingLimited
DOI 10.1108/WJSTSD-05-2019-0025
Received 15 May 2019
Revised 10 June 2019
Accepted 24 June 2019
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