Determinants Of Decline Trend Of Foreign Direct Finance Essay

INTRODUCTION

1.1 Introduction and Background

The term ‘investment’ can be described as the stock or bonds obtained to accomplish certain financial goals; it can also mean a physical asset such as a tool acquired to produce and sell a product. Idle cash is not an investment, since its value is likely to be eroded by inflation and it fails to provide any type of return. The same cash placed in a bank savings account would be considered an investment, since the account provides a positive return. Investment may be real investment or financial investment. Real investment means increase in physical stock of capital such as machinery, buildings, and plants etc, while financial investment means that investment which does not increase the productive capacity of the economy such as, purchase of some running plants, or share of some already existing firms and purchase of bonds etc. Sometimes investment creates confusion with capital. In fact, investment is the flow of spending that adds to the physical stock of the capital (it means that investment is a flow concept, because it is concerned with the accumulated volume of capital). Meanwhile investment is a flow variable and to create new capital and capital is stock variable. Foreign private investment can be categorized into two forms i.e. Foreign Direct Investment (FDI) and portfolio investment. This study focuses only on the FDI. FDI may be outward FDI and inward FDI. Outward FDI refers to direct in abroad, while inward FDI refers to direct investment in host countries or direct investment comes from abroad. Investment is the act of purchasing those goods, which can generate further goods. There are two types of FDI i.e., outward FDI and inward FDI. The former is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDI, which are also known as "direct investments abroad." Different economic factors encourage inward FDI. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDI include necessities of differential performance and limitations related with ownership patterns. Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the multinational corporations (MNCs). Horizontal foreign direct investments happen when a multinational company carries out a similar business operation in different countries. Foreign direct investment is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. It is generally acknowledged that foreign direct investment produces economic benefits to the recipient countries by providing capital, foreign exchange, technology, competition and by enhancing access to foreign markets (Crespo and Fontura, 2007). By bridging the gap between domestic savings and investment and bringing the latest technology and management know-how from developed countries, foreign direct investment (FDI) can play important role in achieving rapid economic growth in the developing countries (Khondoker and Mottaleb, 2007). FDI is one of the most important forms of international capital flows. Particularly for Less Developed Countries (LDCs) like Pakistan, India and Indonesia, FDI has been the most important source of foreign investment and an important source of technological spillovers. A transitional economy often looks outward in order to find the opportunity for rapid growth. Inward FDI helps them acquire the technology of the developed world and apply this more advanced technology to their industries. Transition economies may expect other benefits too. Since foreign firms increase competition, their presence may encourage greater efficiency in domestic firms. Even foreign investment may help increase workers incomes, if it creates higher paying jobs in the host country. Because foreign investment offers many potential benefits to host countries, policy makers are naturally interested in knowing what factors attract FDI. There is no presumption among many academics and policy makers that Foreign Direct Investment (FDI) is somehow special. One common view is that FDI helps accelerate the process of economic development in host countries. Many researchers confirmed that the host country’s development efforts have significant effect on the foreign direct investment attraction (Alfrao, 2003). It is not exaggerated to say that FDI plays essential role in the encouragement of national economic development, bringing innovative technology, up to date management and marketing techniques. When domestic resources are short to finance the development requirements, FDI is one of the sources of external finance for lower income countries, like Pakistan, India and Indonesia Azam, and Lukman (N.D.). Foreign direct investment (FDI) refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It usually involves participation in management, joint-venture, transfer of technology and expertise (Khalid and Shah, 2012). Foreign Direct Investment had been increasing at an encouraging rate from FY 2000 onwards. It reached a record inflow of $5.4 billion in FY 2008 but then began a steep decline and is currently at about $ 1.57 billion. This sharp decline in a mere 3 years period is an alarming signal for the economy because FDIs are a major portion of the net inflows in the country. FDI is important for the growth of every economy and its importance cannot be ignored for developing countries in particular (Khalid and Shah, 2012). The key literature includes work by Dunning (1993), who introduced an Ownership-Location Internalization (OLI) paradigm to explain FDI by Multinational Enterprises. Dunning’s location advantage theory provides a framework to identify important variables that influence FDI using three main categories: (a) economic, (b) social or cultural factors, and (c) the political environment. Overall, Dunning concludes that foreign countries that attract investment by multinational firms have a large and growing market, a high gross domestic product, low production costs, and political stability. Various researchers studied the demand side factors such as market size, incentives and operating conditions, infrastructure and political stability, while they ignored the supply side determinants, such as economies of scale, product life cycle and internalization. Also the demand side determinants have analyzed by using aggregate variables but they did not give any proper coverage to supply side determinants due to non-availability of data. While many of studies have been conducted regarding to test the FDI determinants and found the size of the market almost universally as an important determinant of FDI in developing countries. Asiedu (2002) applying Least Square techniques for all estimations in the study and found that openness, return on investment and GDP as proxy variable for market size, are significant variables for FDI fostering and infrastructure and political risk found insignificant. Quazi and Mahmud (2004) investigated that which factors, either economic or non-economic, drive the flow of FDI into South Asia and found that economic freedom, openness, prosperity, human capital, and lagged FDI significantly increase FDI inflow into South Asia, while political instability depresses it. Naeem, Ijaz, and Azam (2005) found that the main economic factors are market size, domestic investment, trade openness, indirect taxes, inflation, and external debt. Jana (2008) reported as one would expect that GDP and access to European common market are important determinants of the foreign direct investment level in the transition economies. Lucas (1990) argues that only political risk is an important factor in limiting capital flows. Investments in many developing countries are exposed to large political risks, so FDI inflows are large for politically unstable countries. By the same token, FDI outflows are large for politically stable countries to invest in countries with large political risks. Fry, Classens, Burridge, & Blanchet (1995) found that the requirement to surrender export proceeds to the monetary authorities and the existence of special exchange rates for some capital account transactions reduces the probability that FDI is independent. The more liberal a country's foreign exchange system, the more likely FDI is to be independent or exogenous. FDI is associated with a larger increase in capital formation when it is independent than when it is "Granger-caused" by other capital flows. Singh and Jun (1995) also show that political risk and business operating conditions have been important determinants of FDI for countries that have historically attracted high FDI. For countries with relatively low FDI, a key determinant was the degree of sociopolitical instability. A country's orientation toward exports is the strongest variable for explaining why a country attracts FDI. Chan and Gemayel (2004) find that the degree of instability associated with investment risk is a much more critical determinant of foreign investment in the Middle East and North Africa region countries than it is for developing countries, which have lower level investment risk. There are other factors, including above-mentioned ones, of FDI. They are macroeconomic determinants (Hymer, 1960; Agmon and Lessard, 1977; Froot and Stein, 1991), internalization theory (Johanson and Vahlne, 1977), intangible assets (Morck and Young, 1992; Markides and Ittner, 1994; Denekamp, 1995), capital market mispricing (Baker, Foley, & Wurgler 2006), and shareholder’s wealth effect (Desai, Dukas, & Fatemi, 1995; Strickland and Hamaifar, 1990) and stock market liberalization and corporate governance (Demirguc-Kunt and Levine, 1996; Henry, 2000a,b; Admati and Pfleiderer, 2000). The previous literature on foreign direct investment confirmed that there are many factors which contribute to the inflow of foreign direct investment in any country. So based on the previous literature the current study selected the political instability, law and order situation, economy crisis, and high tax rate as the influential factors of the FDI inflow in Pakistan.

Purpose Statement

Foreign Direct Investment was increasing at tremendous rate in the Pakistan form the financial year 2000 to onwards so that it reached to 5.4 US billion dollars at the end of financial year of 2008. But after 2008 it started declining and in 2012 it reached to 1.57 US billion dollars. This sharp and sudden declining in the rate of FDI is very dangerous for the growth of any economy especially the economy of developing country like Pakistan. As the FDI is important for the growth of every economy and its importance cannot be ignored for developing countries in particular, therefore the current study paid attention to the factors behind the declining trend of the foreign inflows for investment in the context of Pakistan.

Objectives of the study

Main Objective

The main objective of the study was to find out the main causes of declining trend of FDI in Pakistan.

Sub objectives

To find out the impact of law and order situation on the declining trend of FDI in Pakistan.

To find out the impact of Political instability on the declining trend of FDI in Pakistan.

To find out the impact of economy crisis on the declining trend of FDI in Pakistan.

To find out the impact of High Corporate Tax Rates on the declining trend of FDI in Pakistan.

1.4 Significance of the study

The present study finds out the effect of different factors on the foreign direct investment in Pakistan.

The current study contributes to the existing knowledge on the foreign direct investment inflow in Pakistan and clarifies the factors which are the main cause of declining of foreign direct investment in Pakistan.

The present study provides a range of useful policies that can be practically implemented to enhance the foreign direct inflow in Pakistan.

Lastly, the current study is significant in a way that it provides the theoretical understanding of the effect of law and order situation, political instability, high tax rates and economy crisis on the flow of FDI in Pakistan. .

1.5 Research question and Hypothesis

1.5.1 Main research question

What are the factors which contribute to the declining trend of foreign direct investment in Pakistan?

1.5.2 Hypothesis

H1: Law and order situation significantly affect the foreign direct investment in Pakistan.

H2: Political instability significantly affects the foreign direct investment in Pakistan.

H3: High corporate tax rates significantly affect the foreign direct investment in Pakistan.

H4: Economy Crisis significantly affects the foreign direct investment in Pakistan.

Law and order situation

Economy crisis

High corporate tax

Political instability

Decline of FDI

1.6 Conceptual Framework of study

Chapter 2

LITERATURE REVIEW

Foreign Direct Investment

It is argued that the foreign direct investment fastened the growth of the economy of host country. It also increases the economic globalization of the global economy rapidly. It is suggested by Jensen, (2003); Bengoa & Sanchez, (2003); Borensztein, De Gregorio, & Lee, (1998); Tarzi, (2005) that foreign direct investment creates employment opportunities, enhances technological environment, improve the productivity of host country and a source of transfer of latest technology between the developing countries. It is said that many countries though hesitant about the political and social impact of foreign investors and also feels fear to depend on FDI have rapidly changes its policies about liberal trade and changes its olitical policies to attract more and more FDI since the era of 1990’s (Bengoa & Sanchez-Robles, 2003; Brewer, 1 995; Dutta and Roy 2009; Jaffee and Stokes, 1996; Jensen 2008; UNCTAD, 2009). There are many factors which contribute to the encouragement and discouragement of foreign investment. In simple way the opportunities prevailing in market and location of host economy helps the host country to attract the foreign investment. According to Becker, et al., (2006); Bengoa & Sanchez-Robles, (2003); Fung, Garcia-Herrero, & Siu, (2009); Hill & Munday, (1995); Kolstad & Villanger, (2008); MacDermott, (2007); Sethi, Guisinger, Phelan, & Berg, (2003); Slaughter, (2003); UNCTAD, (2009) large domestic market size, growth opportunities, economic development, infrastructure, and high natural resources equipment are the majors factors to attract the foreign direct investment. It is argued that the unstable environment and bad trade policies of host countries discourage the foreign direct investment. The argument was confirmed by the studies of Büsse & Hefeker, (2005); Büsse & Hefeker, (2007); Bussmann, (2010) ; Büthe & Milner, (2008); Daniele & Marani, (2010); Diamonte, Liew, & Stevens, (1996); Enders, Sachsida and sandler (2006); Haftel (2006); Jensen (2004 & 2008); Ramamurti and Doh, (2004) that political instability at domestic and international level discourage the investor to invest in the host country. The studies of Barthel, et al., (2010); Berger, et al., (2010); Büsse & Groizard, (2008); Büsse & Hefeker, (2005); Büsse & Hefeker, (2007); Daniele & Marani, (2010); Dutta & Roy, (2009); Globerman, et al., (2006); Singh & Jun, (1995) concluded that the good governance, and quality of governmental institutions is a good source to attract the foreign direct investment in the host country. The research studies of Globerman & Shapiro, (2003); Globerman, et al., (2006) explored that the sound trade policies and stable legal environment encourage the foreign investors to invest in the host country. The results of Globerman studies were confirmed by the study of Dutta & Roy, (2009) which concluded that the fair regulative environment of host country encourage the foreign direct investment. The same results were found by the Büsse & Groizard, (2008). The previous research studies also showed that political risk, stable legal system, and low corruption rate in host country has significant and positive impact on the inflow of foreign direct investment (Asiedu, 2006; Büsse & Hefeker, 2005; Büsse & Hefeker, 2007; Harms, 2002; and Li, 2006). The prior researches also showed that stable environment for investment, smooth trade policy and in-discriminatory treatment with foreign investors also attracts the foreign direct investment to the host country (Tarzi, 2005). Same factors were analyzed and confirmed by the Berger, et al., (2010) that sound and stable investment environment, smooth investment agreements and treatment of host countries with the foreign investors without any discrimination helps to attract more and more foreign direct investment to the country. The studies also confirmed the affect of taxation on the FDI attraction. The fair tax policies also help the foreign investors to invest in the host country e.g. the double tax treaties remove the double taxation on the foreign earned income to encourage more and more foreign investment (Barthel, et al., 2010). So it is confirmed from the previous researches that there are numerous factors which affect the FDI which mainly are political stability, safe legal environment, sound investment environment, infrastructure, taxation policies, low corruption rate, economic development, market size, growth opportunities, and good governance etc. as the present study was about the declining trend of FDI in Pakistan so the present study selected the only four factors which can be the main cause of declining of FDI in Pakistan. These factors were political instability, High tax rate, economy crisis, and law and order situation as these factors were mostly discussed in the existing literature in relation with the attraction or discouragement of the foreign direct investment.

Impact of Law and Order Situation on the FDI

Baek, k; & Qian, X (N.D.) explored the impact of political risks on the foreign direct investment flow in the context of developing and industrialized economies. The purpose of the study was to find that whether political risks have any effect on the foreign direct investment or not in developing and industrialized countries. The study was exploratory in nature, so the study used the 12 category Political Risk Index assembled by the International Country Risk Guide (ICRG). The components of political risks were external conflicts, democratic accountability, investment profile, military in politics; ethnic tensions were taken to check their impacts on FDI. The results of study in the context of developing countries explored that political risk is an important determinant of foreign direct investment. The study also showed that the political risk is an important determinant of foreign direct investment in the industrialized economies. However the study found that not all the aspects of political risks are same in developing and industrialized nations. Furthermore the study explored that before 9/11 attacks, among the components of political risk only external conflict has significant effect on the FDI. But after the 9/11 attacks democratic accountability, investment profile, and military in politics have significant positive effect on the FDI while ethnic tensions have negative effect on the FDI in the industrialized economies.

Khalid, S; Shah, M; Ullah, H (2012) conducted the research to explore the declining trend of foreign direct investment in Pakistan. The purpose of the study was to explore the factors which are the main causes of declining of foreign direct investment in Pakistan. The study was qualitative in nature so the data was collected from the internet sources, magazines, interviews, newspapers, bulletin etc. of the years 2002 to 2010 on the FDI in Pakistan. The study explored the facts that the FDI in Pakistan has declined to 1.57 billion US dollar from 5.7 billion US dollars during 2007 to 2010. The study also explored that the main causes of the declining trend of foreign direct investment in Pakistan was the political instability, law and order situation, energy crisis, corruption, lack of required infrastructure, lack of enforcement of contracts, comparatively less share of credit to non-govt. sectors and high corporate tax rates. The main factor which affects the FDI was the law and order situation. In the year 2000 there were only 14 blasts in Pakistan which have increased to 392 in the July, 2011 which shows the bad governance in Pakistan.

Ajayi, I (2006) conducted the study to explored the factors which affect the inflow of foreign direct investment in the Sub-Saharan Africa. The study used low cost labor; large domestic market; skilled labor force; adequate infrastructure; proximity to European countries; macroeconomic policy; institution; rule of law; and agglomeration economics as the factors of FDI which were selected by concerning the panel data from 1990 to 1998. The study used the GMM model to check the effects of all the mention factors on the FDI. The study explored that the most important factors which affect the FDI were institution and agglomeration. The study also explored that the FDI was affected by the natural resources wealth and labor cost. The study explored that rule of law also has significant effect on the FDI. Furthermore the study explored that the countries which has flexible trade policies and fewer trade restrictions attracts more foreign direct investment. Lastly the study explored that natural resources abundance and infrastructure are the most important factors of FDI in CIS countries.

Azam, M; and Lukman, L (N.D.) conducted the comparative study to determine the factors affecting the foreign direct investment in the context of Pakistan, India, and Indonesia. The purpose of the study was to identify the different factors which affect the foreign direct investment in Pakistan, India, and Indonesia during 1971 to 2005. The study selected the economic and political stability, provision of infrastructure, peace and security, law & order situation, encourage domestic investment, market size, trade openness, curtail external debt, appropriate monetary and fiscal policy to check their impacts on the foreign direct investment in the context of Pakistan, India, and Indonesia. The data of the study was collected from the economic survey of Pakistan (various issues), economic survey of India (various issues), world investment report (various issues), and world development indicator (various issues) respectively. The study used the ordinary linear square method to analyze the data. The results of the study showed that in case of Pakistan, market size has positive and significant effect on the foreign direct investment (p < 0.001), same results were found by Chakrabarti (2001, 2003), Ioannatos (2003), Banga (2003), and Eli et al., (2006). The study showed that external debt also has significant effect on the foreign direct investment (p < 0.001); same results were found by Asiedu (2002), and Ioannatos (2003). The study also found that trade openness has significant and positive effect on the FDI (p < 0.001); same results were found by the Aseidu (2002) and Ioannatos (2003). Domestic investment was found to be the significant influential factor of the FDI (p < 0.005); same results were found by the Razin (2003) and Yasmin et al. (2003). The impact of indirect taxes on FDI was significant but negative (p < 0.005); this finding was similar to the finding of Chakrabarti (2003). Return on investment has also significant and positive relationship with the FDI in Pakistan context (p < 0.005); this finding was similar with the finding of Tsai (1994). The inflation rate has no significant effect on the FDI inflows in Pakistan. In case of India all the factors has significant relationship with the FDI at 5% level of significance except the inflation rate and domestic consumption. However, the results of Pakistan and India were not match with the results gained from Indonesia. Hence the vast literature of previous studies on the factors of FDI strengthens the assumption of present study that the law and order situation of any country affect the FDI trend.

Impact of Political Instability on FDI

Haksoon, K (2010) conducted the study to investigate the impact of political stability on the foreign direct investment. The purpose of the study was to identify the different factors which contribute to the inflow of foreign direct investment at country level. The study was quantitative in nature, which used the different sources to collect the data. The data was collected from the World Investment Report (WIR) Annex Tables, United Nations Conference on Trade and Development (UNCTAD). World Investment Report Annex Tables provide detailed statistical data on FDI flows, FDI stock and cross-border mergers and acquisitions. Three years data was collected on the FDI inflows, FDI outflows and FDI inflows performance. The regression analysis was done to analyze the data. The results of the study showed that countries with high political rights have higher FDI outflows. The study also showed that countries with the government corruption on high level and democracy at low level have higher FDI inflows. Hence the study findings showed that political factors are the most important factors which influence the FDI flows. The study also found that the level of government corruption has significant and positive effect on the FDI inward performance. Political rights have significant negative effect on the FDI inward performance. Lastly the study found that the politically unstable countries attract capital flows from developed countries with high political stability.

Shahzad, A; Mithani, D.A; Al-Swidi, A.K; and Hanim, F (2012) conducted the study to investigate the impact of political stability on the inflow of foreign direct investment in the context of Pakistan. The study was done after seeing the declining trend in foreign direct investment in Pakistan since 2008, with the purpose to determine the factors which influence the foreign direct investment in Pakistan. The study took GDP growth rate, trade openness, inflation rate, corruption control index, macroeconomics, business environmental factors, and political stability as the independent variables to check their impact on FDI inflow, which was the dependent variable of the study. The data was collected from the World Bank report of 2011, World Development report of 2011, and UNCTAD 2011. After analyzing the data the results of the study showed that GDP growth rate significantly and positively influences the FDI inflows in the context of Pakistan. The study found the significant and positive influence of trade openness on the FDI inflows in Pakistan. The rate of inflation in Pakistan also found to be the significant influential factor of the FDI inflow in Pakistan. The study also found that corruption control index has significant relationship on the FDI inflow in Pakistan. Moreover, the study showed that macroeconomics and business environmental factors have significant effect on the FDI inflow. Lastly, the study found that the political stability moderates the effect of macroeconomic and business environment factors on the FDI inflows in the context of Pakistan.

Kadam, R.N (2012) conducted the study to determine the factors which attract foreign direct investment in India. The purpose of the study was to find the factors which can attract the foreign direct investment in the India. Another purpose of the study was to find the effect of foreign direct investment on the economy of India. In this study the secondary data and information were gathered from the previous reports. The data of years ranging from 2000-1 to 2010-11 were gathered. The collected data was then analyzed through Statistical methods like tabulations, percentage, ratios etc. after the analysis of the gathered data the study found that political uncertainty on central and state level has significant downward effect on the FDI inflow in India. So, political instability factor was found to be the most significant factor of FDI inflow in India. The study also found that infrastructure, corruption rate and mergers and acquisitions processes also has the significant effect on the foreign direct investment inflow in India.

Brada, J.C; Kutan, A.M; and Yigit, T.M (N.D.) conducted the study to investigate the impact of transition and political instability on the foreign direct investment in the context of Central European economies and emerging markets. The purpose of the study was to examine the detailed impact of transition and political instability on the foreign direct investment of economies Central Europe and the emerging CIS. The results of the study showed that transition status tends to increase FDI inflows and the good development performance of the Central European and Baltic countries enabled them to attract more foreign direct investment as compared to the West European countries. The study also showed that the good development performance of the CIS countries attract more foreign direct investment despite their less impressive transition progress. Moreover, the results of the study showed that a large part of the shortfall in foreign direct investment into the CIS transition economies, measured relative to the Central European economies, is in fact attributable to the effects of regional political instabilities on the willingness of foreign investors to invest in these countries.

Dupasquier, C. and Osakwe, P.N (2005) conducted the study on the foreign direct investment in the context of Africa. The purpose of the study was to investigate the performance of FDI in Africa. The study also proposed to investigate the promotion and aspects for foreign direct investment in the context of Africa. The study took factors such as political and macroeconomic instability, low growth, weak infrastructure, poor governance, inhospitable regulatory environments, and poor investment promotion strategies to check their impact on the foreign direct investment in the African countries. The study concluded that African has not been successful in attracting sufficient foreign direct investment so far. The study found that political instability, macroeconomics instability, weak infrastructure, poor control, hostile regulatory environments, intensification of competition for FDI flows due to globalization, and poor marketing strategies in African countries are the main factors which deter the sufficient foreign direct investment in these countries. Therefore, these countries need to reverse these factors and improve the policies regarding investment to attract the more and more foreign direct investment.

Mijiyawa, A.G (N.D.) conducted the empirical study to instigate the drivers of foreign direct investment in the context of Africa using panel data technique. The purpose of the study was to find the factors which can influence the inflow of foreign direct investment in African countries. The study took trade openness; market size; political stability; return to investment; infrastructure development; and macroeconomic stability as the factors which can influence the foreign direct investment by concerning previous literature on this topic. The study took 53 African countries. The data was collected from different sources over the period of 1970 to 2009. The study used the GMM technique to analyze the data. The results of the study showed that market size, trade openness, and return on investment have significant effect on the FDI inflow in African context. The study also showed that political stability in African countries also has significant influential effect on the FDI inflow in Africa. Moreover, the study concluded that the large African countries attract more FDI than small African countries. Furthermore, the study found that the countries with open and flexible business environment attract more foreign direct investment. Lastly, the study concluded that the countries which manage the FDI inflow today are likely to attract more and more FDI in the future.

Debab, N; and Al-Mansoor, A. (2011) conducted the study to find the factors of FDI and check the impact of FDI on the economy of Bahrain. The purpose of the study was to find the different antecedents of foreign direct investment and its impact on the GDP growth rate in the context of Bahrain during the year 1990 to 2009. The study took market size; growth opportunities; trade openness; Quality of human capital; political stability; macroeconomic stability; infrastructure; FDI promotion policies; and economic freedom as the antecedents of FDI to check their impact on FDI inflows in Bahrain. The study also checked the impact of FDI on GDP growth rate in Bahrain. The data was collected on the FDI inflow in Bahrain of the years 1990 to 2009. Regression analysis and partial least square method were used to analyze the data. The results of the study showed that inflation has positive but insignificant effect on the foreign direct investment which means infrastructure needs to be developed further in Bahrain to attract the foreign direct investment. The results of the study further showed that market size, trade openness, and economic stability had significant and positive effect on the foreign direct investment inflow in Bahrain. Moreover the study showed that political stability and human capital has positive strong effect on the foreign direct investment inflow in Bahrain which means the people of Bahrain are able to attract more and more foreign direct investment. Economic freedom also found to be the significant influential factor of the foreign direct investment inflow in Bahrain. Lastly, the study found that foreign direct investment has high correlation with the GDP growth rate.

Kumar, S (2011) conducted the study to determine the impact of corruption and political instability on the foreign direct inflows in the context of India. The purpose of the study was to find the impact of different factors along with the corruption and political stability on the foreign direct investment flows. The study also proposed to compare the FDI inflow to other 38 countries for the year 2009- 2010. The study took GDP’s of the countries; distance of the countries; corruption perception index; political stability index and trade agreement as the independent variables while foreign direct investment inflows was taken as the dependent variable of the study. Linear regression method was used to analyze the data. The results of the study showed that the GDP of the country from which the FDI is coming to India has significant effect on the FDI inflows (t = 4.34, sig. = 0.000). Corruption perception index has significant effect on the FDI inflows to India (t = 4.41, sig. = 0.000). Trade agreement was also found to be the significant influential factor of the FDI inflow to India (t = 2.12, sig. = 0.041). The study also showed that distance has insignificant and negative relationship with the FDI inflow to India (t = -0.01, sig. = 0.990). Lastly, the study found that political stability has no significant effect on the foreign direct inflow to India (t = 0.37, sig. = 0.710). Hence the vast literature of previous studies on the factors of FDI strengthens the assumption of present study that the political instability in any country contributes to the declining trend of foreign direct investment.

Impact of High Corporate Tax Rate on FDI

Demirhan, E; and Masca, M. (2008) conducted the study to identify the different antecedents of foreign direct investment inflow in the context of developing countries. The main objective of the study was to explore through cross sectional economic model, the different factors of foreign direct investment inflow in developing countries over the period of 2000 to 2004. The study took GDP growth rate; Inflation rate; labor cost; degree of openness; risk; telephone main lines; and corporate tax rate as the independent variables while FDI was taken as the dependent variable of the study. The data on foreign direct investment was collected from the 38 developing countries over the period of 2000 to 2004. After analyzing the collected data the study found that GDP growth rate, telephone main lines, and degree of openness has significant and positive influence on the foreign direct investment inflow in developing countries context. The study also found that the inflation rate and corporate tax rate has significant but negative influence on the foreign direct inflow in developing countries context. Lastly the study found that labor cost and risk has no significant effect on the foreign direct investment inflow in the developing countries context.

Quere, A.B; and Revil, A.L. (2004) conducted the study to investigate the impact of corporate taxation on the foreign direct investment inflow in the context of OECD countries. The purpose of the study was to investigate the impact of agglomeration-related factors and corporate taxes on the foreign direct investment inflow and outflow in the context of 11 OECD countries. The data was collected on bilateral FDI flows from 11 OECD countries of the years 1984 to 2000. After analyzing the data the results of the study showed that the agglomeration-related factors are the strong influential antecedents of the foreign direct investment flows. The study also showed that the corporate taxes has significant influence on the foreign direct investment provided that the high rate of corporate taxes discourage the foreign direct investment inflow while encourage the outflow of foreign direct investment. It is also concluded that the low rate of corporate taxes encourages the foreign direct investment inflow and discourage the foreign direct investment outflow.

Edmiston, K; Mudd, S; and Valev, N. (2003) conducted the research study to impact of complexity and uncertainty of tax structures on the foreign direct investment. The purpose of the study was to investigate the varied experience in tax structures on the foreign direct investment inflow. In simple words the study was done to check the uncertainty and complexity in the tax laws have any deterred effect on the foreign direct investment or not. The data was collected on FDI and tax laws of 24 countries over the last decade. The results of the study showed that complexity and uncertainty in the tax laws has significant negative effect on the foreign direct investment inflow. The study also showed that the multiple tax rates and indeterminate tax language has negative effect on the foreign direct investment inflow. Lastly the study showed that inconsistent changes in the tax laws also negatively affect the foreign direct investment inflow.

Hansson, A; and Olofsdotter, K. (2010) conducted the study to examine the impact of tax differences on the foreign direct investment in the context of European Union. The purpose of the study was to empirically analyze the impact of corporate tax rates on the foreign direct investment flows in the context of European Union. The study used the panel data on the bilateral foreign direct investment flows in European Union. The study took 27 European countries for the study in which 12 countries were the newly added countries to the EU. The data was collected on the corporate taxes rates during 1995 to 2006 in all 27 European countries. The study showed that tax differences have significant effect on the foreign direct investment inflow in new members of EU. It means that the new members of EU can attract the more and more foreign direct investment by providing lower tax rates. The study also found that the old EU members attract the foreign direct investment due to the agglomeration economies. Lastly, the significant differences were found between the factors of the extensive and intensive margins of the foreign direct investment decision.

Yasmin, B; Hussain, A; and Chaudhary, M.A. (2003) conducted the research study to determine the factors affecting foreign direct investment in the context of developing countries. The purpose of the study was to identify different factors and their impact on the foreign direct investment in the context of developing countries. The study took urbanization; GDP per capita; standard of living; inflation; current account; wages; labor force; domestic investment; trade openness; and external debt as the antecedents of the foreign direct investment in the developing countries. The panel data was collected from the sample of 15 developing countries with 5 each from upper middle, lower middle and lower income countries. Random effect, common intercept model, and fixed model were used to identify the different factors affecting the foreign direct investment in developing countries. The results of the study showed that urbanization, GDP per capita, standard of living, inflation, current account and wages are the factors which significantly affect the foreign direct investment in the context of low income countries. Moreover the study showed that urbanization, labor force, domestic investment, trade openness, standard of living, current account, external debt and wages are the factors which affect the foreign direct investment in the context of lower middle income countries. Lastly, the study showed that urbanization, labor force, GDP per capita, domestic investment, trade openness and external debt are the factors which significantly affect the foreign direct investment in the context of upper middle income countries.

Desai, M.A; and Foley, C.F. (2002) conducted the study to investigate the different factors which influence the foreign direct investment in the context of American multinational companies. The purpose of the study was to clearly investigate the effect of chains of ownership and regional tax competition on the foreign direct investment in American companies’ context. The study used the affiliate-level data on the behavior of American companies during the period of 1982 to 1997. The study showed that the higher tax rates lower the inflow of foreign direct investment. It is reported that the 10 percent higher tax rates reduces the foreign direct investment inflow to 5 percent and also yields 0.9 percent lower return on assets. The study also reported that in Europe, 10 percent higher tax rates lower the foreign direct investment to 7.7 percent and yields 1.7 percent lower return on assets. Indirectly owned foreign businesses also showed significant tax effects, 10 percent higher tax rates lowered the foreign direct investment to 12.0 percent lower and 1.4 percent lower returns on assets. American firms finance a growing fraction of their foreign operations indirectly through chains of ownership, which now account for more than 30 percent of aggregate foreign assets and sales. Ownership chains are particularly concentrated among European affiliates.

Mughal, M.M; and Akram, M. (2011) conducted the study to check the effect of different factors on the foreign direct investment in the context of Pakistan. The purpose of the study was to determine the impact of market size, exchange rate, and corporate tax rate on the foreign direct investment in Pakistan. The study took market size, exchange rate, and corporate tax rate as the independent variables while foreign direct investment as the dependent variable. The study collected the time series data ranging from 1984 to 2002. The study used the ARDL and error correction model to analyze the data. The results of the study showed that market size has the significant effect on the foreign direct inflow in Pakistan (t = 5.60; p < 0.001), same results were found by the studies of Root & Ahmad (1979), Wheeler & Moody (1992) & Pistoresi (2000). The study reported that the one percent increase in market size increases the inflow of foreign direct investment in Pakistan to 5.60 percent. The study also showed that the exchange rate has significant but negative effect on the foreign direct investment in Pakistan (t = -3.42; p < 0.001), same results were found by the studies of Caves (1988), Froot & Stein (1991) and Blonigen & Fenstra (1996). The study reported that the one percent increase in the exchange rate decreases the inflow of foreign direct investment in Pakistan to 3.42 percent. Lastly, the study showed that corporate tax rate has no significant effect on the inflow of foreign direct investment in the long run in Pakistan; same results were found by the studies of Wheeller & Mody (1992), Jackson & Markowski (1995) and Porcano & Price (1996). Hence the vast literature of previous studies on the factors of foreign direct investment strengthens the assumption of present study that the high corporate tax rates in any country contribute to the declining trend of foreign direct investment.

Impact of Economic Crisis on the FDI

Mamata, T. (2011) conducted the study to check the impact of global financial crisis on the flows of foreign direct investment in the context of housing sector of India. The purpose of the study was to investigate the impact of financial crisis on the foreign direct investment flows in the real estate sector of India from 2005. The other purpose of the study was to compare the FDI flows of real estate sector with the other sectors of India. The study also proposed to check the impact of FDI flows on the economic growth of India. The secondary data was collected on the foreign direct investment flows from 2002 to 2010. The results of the study showed that foreign direct investment flows in housing sector showed the declining trend after the global financial crisis. It means the financial crisis affected the foreign direct investment flows negatively in the context of real estate sector of India. The declining trend in FDI also affected the GDP growth rate in India. However the study reported that the impact of recession was avoided by the government involvement, and certain efforts in real estate have in fact helped the economy grow in India.

Keomixaya, B; and Ngamkroeckjoti, C. (2011) conducted the study to determine the different factors affecting the foreign direct investment in the context of Savannakhet Province, Lao People’s Democratic Republic. The foremost objective of the study was to identify different factors which influence the foreign direct investment in the context of Savannakhet province,

Lao People’s Democratic Republic. Another purpose of the research study was to check the impact of investment environment on the foreign direct investment inflow in Savannakhet province, Lao People’s Democratic Republic. The study also proposed to understand the foreign direct investment situation and to find the ways to attract more and more foreign direct investment. The study was based on the model of John Dunning Eclectic Model or "OLI paradigm" in 1976 and International product life cycle theory was developed by Raymond Vernon in 1966. The management level employees of foreign companies in Savannakhet province, Lao People’s Democratic Republic were selected as the population of the study, the data was collected from the sample of 137 management level employees of foreign companies in Savannakhet province, Lao People’s Democratic Republic through survey questionnaire technique. Interviews were also conducted to collect the data from the sample of the study. The sample of the study was selected through judgment sampling, quota sampling and convenience sampling method. The results of the study showed that the political and government legal factor has significant effect on the foreign direct investment inflow (f = 35.90; p < 0.001) and this factor is considered as the most important factor to attract the foreign direct investment in Savannakhet province, Lao People’s Democratic Republic. The study also showed that economic and market factor has significant influence on the foreign direct investment inflow (f = 6.61; p < 0.001). The financial factor has significant influential effect on the foreign direct investment inflow (f = 7.74; p < 0.001). Lastly, the study found that the social and culture factor also has significant effect on the foreign direct investment inflow in Savannakhet province, Lao People’s Democratic Republic (f = 6.05; p < 0.001).

Mahmoud, A.A. (2011) conducted the study to examine the impact of financial crisis on both foreign direct investment inflow and outflow. The purpose of the study was to investigate the effect of financial crisis on the bilateral foreign direct investment flows in both host and home countries. The study took six home countries having largest foreign direct investment flows and 42 host countries to conduct the study. The study collected the panel data over the period of 1985 to 2008 on foreign direct investment flows of home and host countries. The study used GMM estimator to the gravity model to investigate the flows of foreign direct investment. After the analysis the study concluded that financial crisis has significant negative effect on the bilateral foreign direct investment flows which showed that financial crisis has negative effect on the foreign direct investment flows on all type of countries during the past 23 years. The study also concluded that the magnitude of the negative shock of financial crises on foreign direct investment differs by type and origins causing the financial crises.

Anagnostis, K. (N.D.) conducted the study to determine the different factors influencing the foreign direct investment inflow in the context of emerging markets. The purpose of the study was to find the impact of different factors along with the political risk on the foreign direct inflow in the emerging markets. The study checked the impact of different factors on FDI inflow of the emerging markets of South Eastern Europe and black sea countries. The study took the political risk, economic stability (measured by inflation rate, GDP growth rate, trade deficits, exchange rate stability etc.), social stability, monetary restriction and credit policy as the antecedents of the foreign direct investment inflow in the context of emerging markets. The results of the study showed that the political risk has significant effect on the inflow of foreign direct investment in emerging markets. The social stability and credit policy were also found as the influential factors of the foreign direct inflow in the emerging markets. The study also showed that the economic stability has significant influential effect on the foreign direct investment inflow in emerging markets context.

Lim, E.G. (2001) conducted the study to determine the factors of foreign direct investment and its impact on the growth of economy in the European countries context. The study took various factors such as economic distance/ transport cost, market size, agglomeration effects, factor/labor cost, fiscal incentives, business climate, political stability, economical stability, and trade openness as the determinants of the foreign direct investment. The study also proposed to check the impact of foreign direct investment on the economy growth. The data was collected on the foreign direct investment and economy growth of European countries. The results of the study showed that the market size has significant influence on the foreign direct investment. Lower labor cost was found to attract the foreign direct investment. The study also found that the political risk, economic instability has significant effect on the foreign direct investment. Lastly, the study also found that the fiscal incentives and trade openness were the strong influential factors of the foreign direct investment. Hence the vast literature of previous studies on the factors of foreign direct investment strengthens the assumption of present study that the economic crises in any country contribute to the declining trend of foreign direct investment.

Chapter 3

Chapter 3: Research Design & Methodology

3.0 Introduction

The main objective of this chapter was to discuss and explain the research methodology to be used in the collection of data and after collection, analyzing the data to check and test the research model of proposed study, which is the effect of different factors on the declining trend of FDI in Pakistan. Data collection technique and method, population, sampling techniques, validity and reliability of data, and data analysis technique were discussed in this chapter.

3.1 Design and Procedure

The study was conducted to check the effect of different factors on the declining trend in foreign direct investment in Pakistan. as the purpose of the study was to confirm the results of the previous studies so the present study was quantitative in nature in which the data was collected through survey questionnaires on the variables of the study which were law and order situation; political instability; high corporate tax rates; economy crisis; and downward FDI. The study used the questionnaire survey technique to collect the data through questionnaire on variables of the study. The core reason for selecting the questionnaire technique was that it consumes less time and these are cost effective when compared to the interview method. Another reason is that questionnaires vastly used in the quantitative technique to collect the data. The data collected through questionnaires can also be analyzed quickly through statistical analysis. The questionnaires technique also reduces the biasness of opinions which can be created in the interview method. Lastly the questionnaires technique creates fewer disturbances as compared with the face to face or telephonic interviews.

3.2 Sampling Technique and Sample Size

The study considered the students of economics departments of different educational institutes of the Pakistan as the population of the study. The sample of the study was the students of economics department of superior and Lahore university of Lahore region. The sample size of the study was the 70 students of economics department of superior and Lahore university of Lahore region. The sample size of the study was selected through convenient sampling technique in which the researcher collect the data from the most suitable and convenient source.

3.3 Measures

For the purpose of measurement of the variables of the study only filled questionnaires were used.The data was collected from the participants through questionnaires survey. The questionnaires of the study were developed by using five point likert scales. The study used 24 questions which were to be answered by the participants of the study. Each variable of the study was measured by asking five point likert scale questions. The measurement of each variable had discussed below:

The variable "law and order" was measured by asking 5 questions from participants by using 5 point likert scale ranging from 1 for strongly disagree to 5 for strongly agree.

The variable "political instability" was measured by asking 5 questions from participants by using 5 point likert scale ranging from 1 for strongly disagree to 5 for strongly agree.

The variable "high corporate tax rate" was measured by asking 5 questions from participants by using 5 point likert scale ranging from 1 for strongly disagree to 5 for strongly agree.

The variable "economy crisis" was measured by asking 4 questions from participants by using 5 point likert scale ranging from 1 for strongly disagree to 5 for strongly agree.

3.4 Reliability and validity

3.4.1 Reliability

The reliability of the questionnaires was checked by the value of cronbach alpha. Since all the values were more than .70 therefore the data is said to be reliable.

3.4.2 Validity

For the validity of the data the present study uses the face validity technique. In face validity the validity of questionnaires are ensured by seeking the opinion of expert in the field of research.

3.5 Data Analysis

The data of the study was analyzed by using SPSS 16.0 software. Following tests were applied to the data.

3.5.1 Descriptive Statistics

The present study employed the descriptive statistics to find the maximum and minimum range of data and also to find the mean and standard deviation of data through frequency tables, descriptive statistics.

3.5.2 Histograms

Histograms were used to check the normal distribution of the data. The bell curved shaped of the data shows that the data is normally distributed.

3.5.3 Scatter Plots

Scatter plots were used to determine the relationship among variables. Scatter plots also confirmed that whether the relationship between two variables is linear or non linear.

3.5.4 Correlation

Correlation was used to check the level of correlation among the variables of the study. The correlation analysis used to find the relationship among variables as well as check the strength of the relationship of different variables. It also showed the direction of relationship between two variables.

3.5.5 Regression

Regression analysis was used to check the strength of relationship among variables. In regression analysis t-test was used to find the level of significance and r-square test was used. R-square test tells that how much dependent variable is affected by the independent variable. At the last the present study employed the f-test to check the overall relationship of the independent variable with dependent variable.

Chapter 4

Data and analysis

Analysis:

Reliability analysis

Sr#

Variables

Items

Cronbach;s Alpha

1

Law and order situation

5

.785

2

Political instability

5

.746

3

Economic crisis

5

.771

4

High corporate tax

5

.868

5

Decline trend of FDI

5

.807

Interpretation:

For checking the reliability of the data and check our instrument is reliable or not we apply inter item consistence test and check our data reliable first variable law and order situation factors in this research have 5 question and value of cronbach’s alpha is .785 that’s shows data or instrument are valid next variable political instability factors and have 5 question and value of .746, next variable economics crisis factors and have 5 question and value of .771 also shows our data are valid for this research and next variable high corporate tax used 5 question and value of cronbach’s alpha .868 shows data are reliable. Last variable high decline trend of FDI used 5 question and value of cronbach’s alpha .807 shows data are reliable because if the value of cronbach’s alpha is greater than .7 than data is reliable and our instrument for this research valid.

Descriptive statistics:

Descriptive Statistics

N

Minimum

Maximum

Mean

Std. Deviation

Law and order situation

70

1.20

4.60

3.3886

.83675

political instability

70

1.20

4.80

3.5229

.97938

Economic crisis

70

1.60

4.60

3.6143

.72737

High corporate tax

70

1.40

4.60

3.5114

.70742

Decline trend of FDI

70

1.40

4.60

3.6514

.72126

Valid N (listwise)

70

Interpretation:

Table presents the summary of all scale variables. For this study used primary data., In this research for understanding of numeric data we apply the descriptive statistic analysis of our scale variable to summarizing data and apply that test our all variables law and order situation, political instability, high corporate tax rates, economy crisis and downward FDI in which we apply the five figure summary in which first column shows number of respondent are 70 which we chose for this study next column shows mean of all variables mean of law and order situation 3.38, minimum value is1.2, the maximum value is 4.6 and standard deviation is .836 next variable political instability first column number of respondent 70 minimum value 1.2, maximum 4.80, mean is 3.5, standard deviation is .97 and next variable economy crisis mean 3.61, minimum value is1.60, the maximum value is 4.60, standard deviation .727 next variable High corporate tax number of respondent are 70 minimum value 1.40, maximum value 4.60, standard deviation .707 Next last variable decline trend of FDI number of respondent are minimum value 1.4, maximum value 4.60, mean 3.6 standard deviation .72.

Histogram:

Interpretation:

The above table shows the data normality of law and order situation variable to check the distribution of data apply histogram. Histogram shows most of the respondent lies on4- 5 that’s shows out of 10 respondent most of the respondent chose disagree and neutral and rest of other respondent chose high and low value and data of law and order situation factors is normally distributed.

The second table shows the data normality of political instability variable to check the normally distribution of data apply histogram. Histogram shows most of the respondent lies on 1.0- 2.0 that’s shows out of 10 respondent most of the respondent chose rest of other respondent chose high and low value and normal curve shows data of political instability is normally distributed.

Third table shows the data normality of high corporate tax rates variable to check the normally distribution of data apply histogram. Histogram shows most of the respondent lies on 10- 20 that’s shows out of 10 respondent most of the respondent chose10- 20, neutral and rest of other respondent chose high and low value and normal curve shows data of high corporate tax rates is normally distributed.

Fourth table shows the data normality of economy crisis variable to check the normally distribution of data apply histogram. Histogram shows most of the respondent lies on 1- 2 that’s shows out of 10 respondent most of the respondent chose agree, neutral and rest of other respondent chose high and low value and normal curve shows data of economy crisis is normally distributed.

Fifth table shows the data normality of decline trend of FDI variable to check the normally distribution of data apply histogram. Histogram shows most of the respondent lies on 1- 2 that’s shows out of 10 respondent most of the respondent chose agree, neutral and rest of other respondent chose high and low value and normal curve shows data of decline trend of FDI is normally distributed.

Scatter plot:

Interpretation:

The above table shows a scatter plot matrix which shows the five scale variables i.e. law and order situation, political instability, high corporate tax rates, economy crisis, and decline trend of FDI. The overall pattern of dots show that there is diagonal upward straight regression line predicting positive relationship between all variables law and order situation, political instability, high corporate tax rates, economy crisis, and decline trend of FDI and apply Pearson correlation to check the mutually relationship between all variables.

Correlation:

Correlations

Law and order situation

political instability

economic crisis

High corporate tax

Law and order situation

Pearson Correlation

1

.803**

.751**

.905**

Sig. (2-tailed)

.000

.000

.000

N

70

70

70

70

Political instability

Pearson Correlation

.803**

1

.825**

.828**

Sig. (2-tailed)

.000

.000

.000

N

70

70

70

70

Economic crisis

Pearson Correlation

.751**

.825**

1

.793**

Sig. (2-tailed)

.000

.000

.000

N

70

70

70

70

High corporate tax

Pearson Correlation

.905**

.828**

.793**

1

Sig. (2-tailed)

.000

.000

.000

N

70

70

70

70

**. Correlation is significant at the 0.01 level (2-tailed).

Interpretation:

To confirm if there was a statistically significant association among law and order situation, political instability, high corporate tax rates, economy crisis, and a correlation matrix was computed. All the variables were approximately normal and there is linear relationship between them hence fulfilling the assumption for Pearson correlation. r calculated of law and order situation and political instability is r=-.803, p value is less than 0.05 that’s shows there is positive relationship between law and order situation and political instability according to Cohen’s (1988) the effect size is strong that’s shows there is strong relationship. Similarly the law and order situation and economics crisis value of r=-.751, p=.000 is shows the highly significant and strong relationship between law and order situation and economics crisis. Similarly the law and order situation and high corporate tax value of r=.905, p=.000 is shows the highly significant and strong relationship between law and order situation and high corporate tax. Over all correlation matrix shows that there is significance relationship between all the variables.

Regression:

Simple regression

Model Summary

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

1

.907a

.822

.819

.30656

a. Predictors: (Constant), highcorporatetax

ANOVAb

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Regression

29.504

1

29.504

313.954

.000a

Residual

6.390

68

.094

Total

35.895

69

a. Predictors: (Constant), highcorporatetax

b. Dependent Variable: declinetrendofFDI

Interpretation:

To check the variation of independent variable on dependent variables simple regression computed. The first table shows the observed values t the law and order situation high corporate tax rates are 81% percent. The value of the adjusted coefficients of determination (adj. R2) is affected. The value of the adjusted coefficient of determination (adj. R2) is .081 which shows that 81% variations in decline trend of FDI. The significance value of anova model shows that model is good fit.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

.406

.187

2.171

.033

highcorporatetax

.924

.052

.907

17.719

.000

a. Dependent Variable: declinetrendofFDI

The coefficient table presents the results of the regression analysis. The objective of the regression in this study is to find such an equation that could be used to find factor that effect on decline trend of FDI. The specified regression equation takes the following form:

Decline trend of FDI = a+ b high corporate tax rates

Decline trend of FDI = -.130+.924 high corporate tax rates

The results show that the independent variables significantly affect the decline trend of FDI. Null hypothesis in high corporate tax rates test is set as the simple regression coefficients are less than o.o5. This test shows that the coefficients of the predictor are statistically significant at less than five percent level of significance.

Simple regression:

Model Summary

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

1

.860a

.740

.737

.37016

a. Predictors: (Constant), economiccrisis

ANOVAb

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Regression

26.578

1

26.578

193.970

.000a

Residual

9.317

68

.137

Total

35.895

69

a. Predictors: (Constant), economiccrisis

b. Dependent Variable: declinetrendofFDI

Interpretation:

To check the variation of independent variable on dependent variables simple regression computed. The first table shows the observed values t the economy crisis is 74% percent. The value of the adjusted coefficients of determination (adj. R2) is affected. The value of the adjusted coefficient of determination (adj. R2) is .073 which shows that 73% variations in decline trend of FDI. The significance value of anova model shows that model is good fit.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

.568

.226

2.513

.014

economiccrisis

.853

.061

.860

13.927

.000

a. Dependent Variable: declinetrendofFDI

The coefficient table presents the results of the regression analysis. The objective of the regression in this study is to find such an equation that could be used to find factor that effect on decline trend of FDI. The specified regression equation takes the following form:

Decline trend of FDI = a+ b economics crisis

Decline trend of FDI = -.130+ .853 economics crisis

The results show that the independent variables significantly affect the decline trend of FDI. Null hypothesis in economy crisis test is set as the simple regression coefficients are less than o.o5. This test shows that the coefficients of the predictor are statistically significant at less than five percent level of significance.

Model Summary

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

1

.744a

.554

.547

.48522

a. Predictors: (Constant), politicalinstability

ANOVAb

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Regression

19.885

1

19.885

84.461

.000a

Residual

16.010

68

.235

Total

35.895

69

a. Predictors: (Constant), politicalinstability

b. Dependent Variable: declinetrendofFDI

Interpretation:

To check the variation of independent variable on dependent variables multiple regressions computed. The first table shows the observed values t the political instability 55% percent. The value of the adjusted coefficients of determination (adj. R2) is affected. The value of the adjusted coefficient of determination (adj. R2) is .054 which shows that 54% variations in decline trend of FDI. The significance value of anova model shows that model is good fit.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

1.720

.218

7.893

.000

politicalinstability

.548

.060

.744

9.190

.000

a. Dependent Variable: declinetrendofFDI

The coefficient table presents the results of the regression analysis. The objective of the regression in this study is to find such an equation that could be used to find factor that effect on decline trend of FDI. The specified regression equation takes the following form:

Decline trend of FDI = a+ b political instability

Decline trend of FDI = -.130+ political instability

The results show that the independent variables significantly affect the decline trend of FDI. Null hypothesis in political instability is set as the simple regression coefficients are less than o.o5. This test shows that the coefficients of the predictor are statistically significant at less than five percent level of significance.

Model Summary

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

1

.793a

.630

.624

.44221

a. Predictors: (Constant), lawandordersituation

ANOVAb

Model

Sum of Squares

Df

Mean Square

F

Sig.

1

Regression

22.598

1

22.598

115.563

.000a

Residual

13.297

68

.196

Total

35.895

69

a. Predictors: (Constant), lawandordersituation

b. Dependent Variable: declinetrendofFDI

Interpretation:

To check the variation of independent variable on dependent variables simple regression computed. The first table shows the observed values t the law and order situation 63% percent. The value of the adjusted coefficients of determination (adj. R2) is affected. The value of the adjusted coefficient of determination (adj. R2) is .62 which shows that 62% variations in decline trend of FDI. The significance value of anova model shows that model is good fit.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

1.334

.222

6.009

.000

lawandordersituation

.684

.064

.793

10.750

.000

a. Dependent Variable: declinetrendofFDI

The coefficient table presents the results of the regression analysis. The objective of the regression in this study is to find such an equation that could be used to find factor that effect on decline trend of FDI. The specified regression equation takes the following form:

Decline trend of FDI = a+ b law and order situation

Decline trend of FDI = -.130+ .684 law and order situation

The results show that the independent variables significantly affect the decline trend of FDI. Null hypothesis in law and order situation test is set as the simple regression coefficients are less than o.o5. This test shows that the coefficients of the predictor are statistically significant at less than five percent level of significance.

Multiple regression:

Model Summary

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

1

.949a

.901

.895

.23372

a. Predictors: (Constant), high corporate tax, economic crisis, political instability, law and order situation

ANOVAb

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Regression

32.344

4

8.086

148.032

.000a

Residual

3.551

65

.055

Total

35.895

69

a. Predictors: (Constant), high corporate tax, economic crisis, political instability, law and order situation

b. Dependent Variable: decline trend off

Interpretation:

To check the variation of independent variable on dependent variables multiple regression computed. The first table shows the observed values t the law and order situation, political instability, high corporate tax rates and economy crisis is 90% percent. The value of the adjusted coefficients of determination (adj. R2) is affected. The value of the adjusted coefficient of determination (adj. R2) is .089 which shows that 89% variations in decline trend of FDI. The significance value of anova model shows that model is good fit.

Coefficientsa

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

-.130

.162

-.802

.425

Lawanda order situation

-.142

.081

-.165

-1.750

.085

political instability

-.197

.060

-.268

-3.292

.002

Economic crisis

.513

.073

.517

7.021

.000

High corporate tax

.884

.105

.867

8.415

.000

a. Dependent Variable: decline trend of FDI

The coefficient table presents the results of the regression analysis. The objective of the regression in this study is to find such an equation that could be used to find factor that effect on decline trend of FDI. The specified regression equation takes the following form:

law and order situation, political instability, high corporate tax rates, economy crisis, and decline trend of FDI

Y= a+bx1+cx2+dx3

Decline trend of FDI = a+ b law and order situation + c political instability +d economics crisis + e high corporate tax rates

Decline trend of FDI = -.130+ -.142lawand order situation+ -.197 political instability +.53 economics crisis + .884 high corporate tax rates

The results show that the independent variables significantly affect the decline trend of FDI. Null hypothesis in political instability, high corporate tax rates, economy crisis test is set as the simple regression coefficients are less than o.o5. This test shows that the coefficients of the predictor are statistically significant at less than five percent level of significance. But law and order situation, significance value grater then 0.05 its means law and order situation, have no relationship with poverty reduction.

Chapter 5

Discussion and conclusion

Determinants of decline trend of foreign direct investment in Pakistan

Dear Participant,

I am a student of MBA superior university Lahore, and aim conducting research on ‘determinants of decline trend of foreign direct investment in Pakistan" The questionnaire will be used for research which is a part of my MBA course. It should not take more than 10 minutes to complete the questionnaire as all of the questions just require you to tick appropriate answer. Your answer will be kept strictly confidential and will only be used for research purposes. Your name will not be mentioned anywhere on the document so kindly give an impartial opinion to make research successful. You are requested to take 10 minutes out of your busy schedule to fill this questionnaire. Your cooperation is highly appreciated.

Thank you for your participation.

1. Name (Optional)__________________

2. Gender:

 Male  Female

3. Age

Less then 25 year 25-35 35-45 45 and above

4. Qualification

Metric or less Intermediate Bachelor Master or above

5. Organization _______________

6. Designation ________________

S.#

Statement

Law and order situation

Ex

5

G

4

A

3

BA

2

P

1

DK 0

I think target killing main barrier for foreign investors

I think suicide bombing blockade foreign investor to invest in Pakistan

I think situation of Karachi society stopped foreign investor

I think police not provide justice on equality basis

I think our judiciary not control country situation

Political instability

I think political situation of our country stopped foreign investor

I think democratic policies not complete due to government instability

I think military policies are not suitable for foreign investor

I think in Pakistan policies have always been linked to individuals.

I think individuals are the fore-runners of their party’s politics.

Economic crisis

I think legislation and regulations in Pakistan discourage foreign investor.

I think energy crisis is main cause of stopped foreign investors

I think poor terrorism effect of Pakistan economy

I think money devolution effect on Pakistan economy

I think Pakistan economy affected on poor policies

High corporate tax

I think Pakistan tax rate higher than other developing country

I think high corporate tax rate threat for foreign investor

I think Pakistan law hurdle for foreign investor

19.

I think tax rate are too much high for foreign investor

20.

I think poor polices of taxes affect foreign investor

Decline trend of FDI

21.

I think law and order situation affect on decline trend of FDI

22.

I think high corporate tax cause of decline trend of FDI

23.

I think economics crisis cause of decline trend of FDI

24.

In think political instability cause of decline trend of FDI

25.

In think poor corporate governess cause of decline trend of FDI

Contact information (optional)

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