Academic journal article International Review of Management and Business Research

Determinants and Factor Dependency of FDI A Study of Pakistan and China

Academic journal article International Review of Management and Business Research

Determinants and Factor Dependency of FDI A Study of Pakistan and China

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

According to the World Investment Report in 2011, more than half of the global FDI is gained by emerging economies. FDI played a crucial role in economic growth of a country. Different countries have different policies aimed at to seek FDI, creating strong incentives for investors to get the FDI. Developing countries look at new sources to acquire FDI and they realized it as good source against trade and opened the door with less barrier and more incentives to utilize it. China shows tremendous growth from the last three decades and it became an importance in the global economy, especially in Asia, has o nly recently begun reforming its financial market and integrating it into the regional and global structures (Chan, dang and Yan, 2012). The flow of FDI has changed towards developing countries like China and it is increasing steadily. Currently, China is the second largest country that realized FDI as compare to whole world. On the other hand, Pakistan is among the larger countries by population1 and area in Asia. However, it is straggle to attract sufficient FDI in order to achieve its developing goals. Interesting, there is a growing influence of China in Pakistan2. In recent years, Chinese investments show rapid growth in Pakistan compare to other countries. In this ground, it is important to understand and unveil different factors affecting the policies aimed at to seek FDI, creating strong incentives for investors to get the FDI.

In general, investors do invest beyond their home country and it depends on a number of factors: to get production and manufacturing benefits in a country, to gain benefits from country strengths like, low labour cost, skilled labour force and stable political conditions. On the other hand some investors want and like to enjoy the benefits of first movers in a particular economy. A best depiction is described in knowledge- capital model by (Carr 2001). Thus, the capital flow in the form of FDI depends mainly on advantages of host country and on the motives of investment by investor. Worries about investment decision by an investor stem from the determinants of FDI and their behaviour. The FDI decision on the hand, hinges on the characteristics of a particular country or location and the level of investment.

The FDI helps a lot to become economically stable and to prosper, created more jobs, to increase exports, to improve labour skills and gave access to improved technology to China (Sunn1998; Kamath 1990). Studies of Azam (2010) and Adhikary (2011) show a significant and positive relation of FDI and economic growth of a country and countries try to make good policies to seek more FDI. Mottaleb (2010) pointed out that FDI not only provides capital to developing countries but also endow with technology and employment to people. FDI enriched with more factors contributing to the economic and financial prosperity. In this study, we investigate where FDI gave investors more opportunities to invest and identify the new factors that contribute to FDI determination in China and Pakistan. The main purpose of this study is to reveal the main determinants of FDI in China and Pakistan. Further, in a comparative study of China and Pakistan, we compare determinants of both countries and analyze which kinds of determinants are important for attracting FDI. This study will help investor and policy maker while making a decision and will elaborate the weak and strong determinants which will provide choices for a better judgment. Further, our findings will help to investors to assess the condition of different countries with same threats and opportunities for FDI. Particularly, we believe that finding of this study enhance the understanding of policy makers and regulators in order to attract and effective use of FDI in China and Pakistan.

According to the literature, number of studies has been conducted to identify the best determinants of FDI, but no clear explanation came out at the acceptance of generalized set of explanatory variables that can be treated as a significant measure of determinates of FDI. …

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