Abstract:

Foreign direct investment has been one of the important sources of economic growth. It will increase not only the level of incomes in host countries but also the productive base of these countries. This study has followed to identify any Granger-Causality among the economic growth and its determinants in terms of causality among Gross Domestic Product, Foreign Investment, Labour Force, Capital formation and infrastructure in a developing country context for Pakistan. The literature has abundant research work on causality analysis of FDI and economic growth. This study also adds by identifying the causal relationship among GDP and its determinants including FDI for Pakistan in time spanning from 1980 to 2008. The Error correction mechanism is adopted and Engle-Granger Causality tests has been applied to identify causal relationship among the included variables. The results indicate that FDI is not granger causing GDP for Pakistan while other important determinants Granger-causing GDP are inflation, infrastructure and trade openness, while FDI is Granger-caused by inflation, trade openness and capital formation. Keywords: Gross Domestic Product, Foreign Direct Investment, Labor Force.

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