Effect of Openness to Trade and FDI on Industrial Sector Growth: A Case Study for Pakistan

Umer, Faiza
Alam, Shaista
Publication date: 
JEL codes: 
C20 - General, O14 - Industrialization; Manufacturing and Service Industries; Choice of Technology.
This present paper is analyzing the effect of trade openness and foreign direct investment (FDI) on industrial sector growth in Pakistan. This paper is examined that Pakistan’s industrial growth is affected by trade openness through a number of channels including monetary policy, fiscal policy, and Fdi. This study is employs Johansen and Juselius co-integration technique and Vector Error Correction Mechanism approach to estimate short run as well as long run relationship using annual time series data for the period 1960-2011. The study found that the relevant macro economic indicators Fdi and Real Gdp have positive and significant long run relationship with industrial sector growth while Trade openness and Inflation have negative long-run relationship with industrial sector growth also Real effective exchange rate have statistically insignificant results in long-run, on the other hand in short run lagged value of own industrial sector, Fdi, Reer, Real GDP have positive and significant impact on industrial sector growth. While inflation and trade openness shows insignificant relationship and Ec (-1) confirms long-run relationship among all independent variables.
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