Bilateral Effect of Foreign Direct Investment and Human Resource on Socio-Economic Development of Pakistan
Total Page：16
File Type：pdf, Size：1020Kb
Bilateral Effect of Foreign Direct Investment and Human Resource on Socio-Economic Development of Pakistan BY Muhammad Tahir Mahmood FUIEMS FOUNDATION UNIVERSITY ISLAMABAD 2012 Bilateral Effect of Foreign Direct Investment and Human Resource on Socio-Economic Development of Pakistan BY Muhammad Tahir Mahmood Reg. No. 33/FUIMS/Ph.D (MS) – 2004 A thesis submitted to the FUIEMS Foundation University, Islamabad In partial fulfillment of the requirements for the DEGREE OF DOCTOR OF PHILOSOPHY IN MANAGEMENT SCIENCES 2012 Team of Supervisor, Evaluators, and Examiners Name Supervisor/Evaluator Affiliation /Examiner Supervision Prof. Dr. Kashif-ul-Rehman Supervisor Head of Graduate Studies, Deptt. of Management Sciences, Iqra University, Islamabad Prof. Dr. M. Iqbal Saif Co-Supervisor Head, Deptt. of Management Sciences, FUIEMS, Foundation University, Islamabad Evaluation Prof. Dr. Amin Sarkar Foreign Evaluator Dean, School of Business, Alabama A&M University, USA Prof. Dr. Syed Azizi Wafa Foreign Evaluator School of Business and Economics, Universiti Malaysia Sabah Examination Prof. Dr. Khair uz Zaman External Examiner Director, COMSAT Vihari Dr. Syed Hassan Raza External Examiner Associate Professor Deptt. of Business Administration, Allama Iqbal Open University, Islamabad Dr. Hummayoun Naeem Internal Examiner Deptt. of Management Sciences, FUIEMS, Foundation University, Islamabad DECLARATION I, Muhammad Tahir Mahmood, a PhD Scholar in the subject of Management Sciences, hereby declares that the matter printed in this thesis titled “Bilateral Effect of Foreign Direct Investment and Human Resource on Socio-Economic Development of Pakistan” is my own work and has not been printed, published, and submitted as research work, thesis or publication in any form in any university in Pakistan and abroad. Signature of Scholar ACKNOWLEDGMENTS Praise is to Almighty Allah Whose countless blessings favoured me in completing this dissertation. This research work could not have been completed but for patronizing the cooperation and guidance of my revered supervisor Dr. Kahif-ur-Rehman. His patronizing and appreciative gesture kept me on the track of continuous struggle for this research work. Also, I would like to send my special thanks to Prof. Dr. Muhammad Iqbal Saif (Head, Department of Management Sciences, Foundation University, Islamabad) for gifting me the research insight. I am equally grateful to Dr. Abdul Rashid Malik (Allama Iqbal Open University, Islamabad), Dr. Imran (Bahu-ul-Din Zakria University, Multan) and Mr. M. Ejaz (Iqra University Islamabad) for their suggestions in the field of data analysis. Again, I am much indebted of all my family members, especially my dear mother and my spouse for praying for my success and extended full cooperation. I am grateful to my brother Nasir Mahmood (Assistant Librarian, The Quaid-e-Azam University) who extended his helping hand to me for the both searching research material from electronic and published sources. Muhammad Tahir Mahmood Table of Contents LIST OF ACRONYMS V LIST OF TABLES VII LIST OF FIGURES IX ABSTRACT X CHAPTER - 1 INTRODUCTION 1 BACKGROUND OF THE STUDY 6 PROBLEM IDENTIFICATION 9 OBJECTIVES OF THE STUDY 10 JUSTIFICATION OF THE STUDY 10 CONTRIBUTION OF THE STUDY 11 DEFINITIONS OF THE TERMS 12 ORGANIZTION OF THE STUDY 14 CHAPTER – 2 AN OVERVIEW OF PAKISTAN’S ECONOMY AND FDI TREND, PATTERN, AND POLICIES 16 OVERVIEW OF PAKISTAN’S ECONOMY 17 EVOLUTION OF FDI POLICIES IN PAKISTAN 20 THE GLOBAL TREND OF THE FDI 26 THE PATTERN AND TREND OF THE FDI IN PAKISTAN 29 THE STRUCTURAL PATTERN OF THE FDI IN PAKISTAN 32 SOURCES OF THE FDI INFLOW 34 THE SECTOR-WISE TREND OF THE FDI IN PAKISTAN 35 THE ANALYSIS OF THE FDI EFFECT ON THE ECONOMY OF PAKISTAN 38 FACTORS FOR LOW FDI INFLOW IN PAKISTAN 41 CONCLUSION 46 CHAPTER – 3 THE FDI AND THE HUMAN CAPITAL 49 THE DETERMINANTS OF THE FDI 50 THE THEORIES OF THE FOREIGN DIRECT INVESTMENT 52 THE PRODUCT LIFE-CYCLE THEORY 52 THE KNICKERBOCKER’S THEORY 53 THE INTERNALIZATION THEORY 53 OLI PARADIGM 53 THE HORIZONTAL AND THE VERTICAL FDI 55 ii THE KNOWLEDGE CAPITAL 55 THE EXPORT PLATFORM THEORY 56 THE EMPIRICAL EVIDENCE OF THE DETERMINANTS OF THE FDI 56 THE HUMAN CAPITAL AS A DETERMINANT OF THE FDI 61 THE IMPACT OF THE FDI ON THE HUMAN CAPITAL 65 CONCLUSION 72 CHAPTER – 4 THE FDI, HUMAN CAPITAL, AND THE SOCIOECONOMIC DEVELOPMENT 75 FDI EFFECTS ON ECONOMIC DEVELOPMENT: A THEORETICAL REVIEW 78 THE FDI AND ECONOMIC DEVELOPMENT: THE EMPIRICL EVIDENCE 81 THE HUMAN CAPITAL AND THE ECONOMIC DEVELOPMENT: THE THEORETICAL AND EMPIRICAL EVIDENCE 89 ROLE OF THE HUMAN CAPITAL FOR FDI EFFECT ON THE ECONOMIC DEVELOPMENT 93 CONCLUSION 97 CHAPTER - 5 THE METHODOLOGY AND THE DATA 98 THE FIRST MODEL: THE HUMAN CAPITAL AS A DETERMINANT OF FDI 99 SELECTION OF THE EXPLANATORY VARIABLES AND HYPOTHESIS (FIRST MODEL) 100 THE MODEL FORMULATION AND MEASUREMENT OF VARIABLES (FIRST MODEL) 101 DATA SOURCE (FIRST MODEL) 103 ESTIMATION OF FIRST MODEL 104 THE SECOND MODEL: THE FDI IMPACT ON THE HUMAN CAPITAL 106 SELECTION OF THE EXPLANATORY VARIABLES AND HYPOTHESIS (SECOND MODEL) 107 THE MODEL FORMULATION, MEASUREMENT OF VARIABLES, AND DATA SOURCE (SECOND MODEL) 107 ESTIMATION OF SECOND MODEL 108 THE THIRD MODEL: THE INFLUENCE OF THE FDI ON THE ECONOMIC DEVELOPMENT OF PAKISTAN 109 SELECTION OF THE EXPLANATORY VARIABLES AND HYPOTHESES (THIRD MODEL) 109 THE MODEL FORMULATION AND MEASUREMENT OF VARIABLES (THIRD MODEL) 110 DATA SOURCE (THIRD MODEL) 111 iii ESTIMATION OF THIRD MODEL 111 THE FOURTH MODEL: IMPACT OF HUMAN CAPITAL ON THE ECONOMIC DEVELOPMENT OF PAKISATN 112 SELECTION OF EXPLANATORY VARIABLES AND HYPOTHESIS (FOURTH MODEL) 112 THE MODEL FORMULATION, MEASUREMENT OF THE VARIABLES AND DATA SOURCE (FOURTH MODEL) 113 ESTIMATION OF FOURTH MODEL 113 CHAPTER -6 FINDINGS AND DISCUSSION 115 THE HUMAN CAPITAL AS THE DETERMINANT OF FDI 116 THE FDI IMPACT ON THE HUMAN CAPITAL 123 THE INFLUENCE OF THE FDI ON THE ECONOMIC DEVELOPMENT OF PAKISTAN 128 IMPACT OF THE HUMAN CAPITAL ON THE ECONOMIC DEVELOPMENT OF PAKISTAN 131 CHAPTER – 7 CONCLUSION AND POLICY IMPLICATIONS 136 CONCLUSION 137 THE POLICY IMPLICATIONS 140 FURTHER RESEARCH 144 LIMITATIONS 144 BIBLIOGRAPHY 146 APPENDICES 156 APPENDIX A: DATA USED IN STUDY 157 APPENDIX B: INVESTMENT POLICIES 159 INTERNATIONAL AGREEMENTS 159 ATTRACTIVE INVESTMENT PACHAGE 161 INVESTMENT ACTS 162 iv LIST OF ACRONYMS ASEAN Association of South East Asian Nations BOI Board of Investment CIPC Central Investment Promotion Committee ECM Error Correction Model EPZ Export Promotion Zone FDI Foreign Direct Investment FIE Foreign Investment Enterprises GDP Gross Domestic Product GFCF Gross Fixed Capital Formation GNP Gross National Product HRD Human Resource Development IMF International Monetary Fund IPA Investment Promotion Agency IPPs Independent Power Producers LDCs Less Developed Countries M & As Merger and Acquisitions MIGA Multilateral Investment Guarantee Agency MNCs Multinational Corporations MNEs Multinational Enterprises NER Net Enrolment Rate NIEs Newly Industrialized Economies NOC No Objection Certificate OECD Organization of Economic Cooperation and Development OLI Ownership, Location and Internalization OLS Ordinary Least Square SAARC South Asian Association for Regional Cooperation v SBP State Bank of Pakistan SHRDC SAARC Human Resource Development Center SIZs Special Industrial Zones SROs Special Regulatory Orders TNCs Transnational Corporations UNCTAD United Nations Conference on Trade and Development UNDP United Nation Development Program WDI World Development Indicators vi List of Tables Table 2.1 The Flow of the FDI in Pakistan by Country 30 Table 2.2 Inflow of the FDI by Elements 33 Table 2.3a The FDI Inflow by Economic Group and Type (1980-1994) 37 Table 2.3b The FDI Inflow by Economic Group and Type (1995-2005) 37 Table 6.1 Results of the Unit Root Test (FDI Model) 116 Table 6.2 Human Capital and FDI (HSEL & EXEDL) 117 Table 6.3 Long-run Relationship Results (human capital and FDI) 118 Table 6.4 Error Correction Model for FDI 119 Table 6.5 Short-run and Long-run Elasticities of FDI Inflow (by HSEL 119 & EXEDL) Table 6.6 Human Capital and FDI (OSEL & EXEDL) 121 Table 6.7 Short-run and Long-run Elasticities of FDI Inflow (By OSEL 122 and EXEDL) Table 6.8 Results of Unit Root Test (FDI Effect on Human Capital) 123 Table 6.9 Effect of FDIL on HSE 124 Table 6.10 Granger Causality Test (FDIL on HSE) 124 Table 6.11 The Effect of FDIL on OSE 125 Table 6.12 Short-run and Long-run Elasticities of OSE 126 Table 6.13 The Effect of FDIL on EXED 126 Table 6.14 Granger Causality Test (FDIL on EXED) 127 Table 6.15 Results of Unit Root Test (FDI Effect on Economic 128 Development) Table 6.16 Effect of FDI on Economic Development 129 Table 6.17 Short-run and Long-run Elasticities of GNPPC (By FDI) 130 Table 6.18 Effect of Human Capital on Economic Development (HSE & 132 EXED) vii Table 6.19 Short-run and Long-run Elasticities of GNPPC (By HSE & 133 EXED) Table 6.20 Effect of Human Capital on Economic Development (OSE & 134 EXED) Table 6.21 Short-run and Long-run Elasticities of GNPPC (By OSE & 135 EXED) viii List of Figures Figure 1 FDI Flow in Pakistan (Million $) 31 Figure 2 Source of FDI the Flow in Pakistan (1990-2005) (Million $) 35 Figure 3 The Sector-wise Distribution of the FDI Flow in Pakistan 36 (1980-1994) Figure 4 The Sector-wise Distribution of the FDI Flow in Pakistan 36 (2002-2005) ix Abstract The Foreign Direct Investment (FDI) as a package of capital, knowledge and skills has been getting popular for the last three decades among the developed as well as the developing countries. As regards its impact on the socioeconomic development of the host country, many developed and developing countries liberalized their economies and adopted radical policies to attract the FDI. Pakistan is one of such countries that took the FDI oriented stance in late 1980s.