Substitution and Complementary Effect of Fdi on Domestic Investment- Empirical Evidence from Sectoral Data in Pakistan

Abstract

It is being argued that foreign direct investment (FD!) brings lots of opportunities particularly for developing countries. In contrast, FD/ may behave like substitute of domestic investment in the presence of domestic firms. However, FD/ can become complement for domestic investment in those sectors where domestic investors don't want to invest due to underdevelopment of that particular area. This study focus es the impact of foreign direct investment (FD!) across various sectors of the Pakistan economy and works on balanced panel data which comprises of seven sectors'. For empirical work, the seemingly unrelated regression (SUR) test is applied on non-stationary panel data. The study found that FD/ crowed out the domestic investment in all seven sectors'. This study suggests that Pakistan needs to go more steps forward towards open economy if it wants to enjoy the true benefit of foreign direct investment. The Study recommends that Pakistan needs to consider the importance of diversification of FD/ across sectors as well as the role of Green Field investment for generating employment opportunities