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Business Research Methodology
Impact of inflation and foreign direct investment on economy.
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Business Research methodology
Impact of inflation and foreign direct investment on economy.
The main point of this research is to study the existence of inflation economy growth relationship of Pakistan. It is, additional, to examine whether it support or hurts the economic growth in a consistent way or it acts in a different way in unusual levels. Panel time-series data for the period 2005-15 have been taken and analysis is made by applying the method of Co-relation and Linear Regression. A moderate and significant inflation rate and economic growth relationship has been found to be present in the economy of Pakistan. The result of this study shows that current inflation rate is dangerous to the growth of the economy after a firm threshold point. On the root of the analysis, it is suggested to the strategy makers and the State Bank of Pakistan to confine the inflation underneath the 8 percent point and to keep it steady. Thus that it may put forth its helpful impacts on economy growth of the economy..
Foreign Direct Investment (FDI) plays a crucial role in speeding up the development and economic growth of a country. In developing countries rely on FDI to promote their economy as they face capital shortage for their development process. The strong growth performances experienced by Pakistan economy greatly depends on the FDI. This study considers the social, economic, and infrastructure factors in which different other factors are considered e.g. trade, exchange rate, GDP, Per capita income (economic factors), health & education (social factors), telephone, internet (infrastructure factors).
Keywords: Inflation, Economic, Growth, Threshold Level of Inflation, Pakistan, FDI, Social Factors, Economic Factors, and Infrastructure Factors.
The word investment refers to the accumulation of some kind of assets in hope of getting a future return.In the broad sense, investment provides the mechanism needed to fiancé the growth and development of an economy. Investment has been categorized into foreign direct investment and portfolio investment. Foreign direct investment (FDI) is real investment and can be defined, as a medium to long-term investment. According to Ragazzi, (1973) Foreign direct investment is the amount invested by resident of a country in a foreign enterprise over which they have effective control.Foreign Direct Investment (FDI) has historically contributed to the development of host countries by way of improving their infrastructure, technical skills, entrepreneur abilities and financial resources In terms of government revenue and foreign exchange. Foreign investment not only brings investment and employment opportunities in the host country but also new technology.
The inflation rate and interest rate are the two most important macroeconomic variables as the behavior of these two variables has a huge impact on economic growth (Muhammad Azmat Hayat 2021) Gül¸sen and Özmen (2020).Achieving stable economic growth is the goal of the nearly all countries. Due to the various factor that effect economic growth it has been nearly impossible to achieve such goal. Inflation negative effect on economy and causes of increasing unemployment and poor growth rate.
So, 1: Social Factors Health, Education 2: Economic Factors GDP Inflation Trade Balance Trade Openness Exchange Rate3: Infrastructure factors Internet Telephone are the variables discussed in my research that effect economy.
The operational definitions of variables are:
To investigate the relation between inflation and economic growth and The inflow of foreign direct investment in Pakistan is very low compared to other part of the world. The question is why it is very low and what are the factors that determine affect FDI?
The objective of this study is to examine the impact of inflation and FDI on economic growth and also impact of social, economic and infrastructure factors on FDI and economic growth in Pakistan.
Do inflation has negative and insignificant effect on FDI?
Is there a positive and significant relationship between economic factors and FDI?
Is there a positive and insignificant relationship between infrastructure factors and FDI?
Is there a positive and significant relationship between social factors and FDI?
Is GDP has any influence on per capita income in Pakistan?
Is exchange rate has any influence on per capita income in Pakistan?
The operational definitions of variables are:
Social factors consist of family, education, institution, and religion that affect the society. It also includes culture factors in which people interact with each other including languages, consumption habits of people, preferences and customs etc. (Remla, 2012) but this study focused on the health and education factors that affect FDI in Pakistan from the period of 2005 to 2015.
These are expenditures by government to provide health facilities to people and other expenses on vaccinations, medicines, hospitals, dispensaries etc. Shah & Iqbal (2016) showed that a positive and significant relationship between government health expenditure (HLT) and foreign direct investment (FDI) exists. s. Health expenditures show the highest change among all variables which means that it is the most important government’s expense that increases with FDI inflows
The indicators cover expenditure on schools, universities and other public institutions. Delivering or supporting educational services. Delivering or supporting educational services (Shah & Iqbal, 2016). The relationship between government education expenditure (EDU) and foreign direct investment (FDI) is also found positive.
2: Economic factors
Economic indicators are key statistics that indicate the direction of an economy. While the indicators can be numerous, there are three broad categories of economic indicators: leading indicators, coincident indicators and lagging indicators (Sullivan, Arthur Sheffrin, & Steven, 2003). It includes GDP, inflation , per capita income and others are followings.
GDP is defined as the total market value of all final goods and services produced within the country in a given period of time
Inflation is used as an indicator of macroeconomic instability (Buckley et al., 2007) as it is defined in world development indicator (World Bank, 2014) the calculation of inflation is measured by the consumer price index which indicates the annual percentage change of the average consumer cost in acquiring a basket of goods and services over the interval time. Inflation rate is one of the variables which measures the given countries macro-economic stability. According to Kinyanjui (2014), through its effect on the cost of inputs and the price of outputs, inflation reduces the real return on investment and firms‟ competitiveness.
Hence, countries that pursue policies that reduce inflation rate have better chance in attracting FDI.
2.3: Market Size
Market size is a fundamental determinant of FDI. The wealth and development of a country can be used as proxy to measure the size of the domestic market. It is believed to be one of the significance determinants that have been used in empirical studies to explicate the inflow of FDI to a host country.
Because if the hosts countries have large market size it will have investment opportunities that will in turn to generate high profit for the foreign firms (Baltagi, 2008).
2.4: trade openness
Trade openness, meaning the degree of liberalization of trade regime of the host country, is regarded as a very important factor that promotes FDI. Open economies mean greater market opportunities. From the perspective of financial development, trade openness means the ability of an economy to obtain funds from other economies, and willingness to invest its surplus fund to other countries.
Here we measured trade openness by the sum of import and export, as a percentage of GDP (Baltagi, 2008).
Exchange rate is defined as the price of currency in term of another currency. Exchange rates are regularly quoted between all major currencies, but frequently one important currency (e.g. the dollar) is used as a standard in which to express and compare all rates . .The exchange rate of all fully convertible currencies is determined, like any price, by supply and demand conditions in the market in which it is traded (i.e. the foreign exchange market).
Here we measured it in Rs/ US Dollar. It has positive effect to economic growth of a country (World Bank, 2014).
2.6: per capita income
Per capita income is a measure of the amount of money earned per person in a nation or geographic region.Per capita income helps determine the average per-person income to evaluate the standard of living for a population Per capita income as a metric has limitations that include its inability to account for inflation, income disparity, poverty, wealth, or savings.
3: Infrastructure factors
Infrastructure covers many dimensions ranging from roads, ports, railways and telecommunication systems to the level of institutional development (Haile & Assefa, 2006).
Infrastructure has been widely acknowledged as one of the key factors that could influence the flow of FDI into the host country. A country that is well equipped with infrastructures such as airports, water supply, power supply, roads, telephone, and internet would be able to minimize the cost of doing business for the investors and allow them to maximize the rate of return on their investments. Therefore, countries that are very well equipped with efficient infrastructure would receive higher FDI.This study has taken only telephone and internet factors as sub factors, it can be extended through railway, roads, posts etc due to which it would be significant in future.
Below the theoretical frame work shows the dependent and independent variables of the study. In which one side foreign direct investment is a dependent variable and another side the independent variables are economic, social, and infrastructure that affect the FDI flow in Pakistan.
Independent Variables Dependent Variable
H1: There is a positive & significant effect of Social factors on FDI.
H2: There is a positive & significant effect of Economic factors on FDI.
H3: There is a positive & significant effect of Infrastructure factors on FDI.
The type of this study based on descriptive and quantitative in nature. Data for this study collected from secondary source like economic survey of Pakistan, World Bank, World development Indicators,
and examines the causal relationship between economic performance and inflation in Pakistan. The models we use to investigate the impact or relationship between inflation , FDI and economic growth are co-relation co-efficient and regression method.
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