FOREIGN DIRECT INVESTMENT AND EXPORT DYNAMICS: EVIDENCE FROM PAKISTAN’S MANUFACTURING INDUSTRIES

Abstract

Foreign direct investment (FDI) is one of the key drivers of manufacturing industry and export competitiveness.  To run the economic system in the right direction low financial capital requires FDI This study examines the relationship between FDI and export performance of selected manufacturing industries in Pakistan. Time series data on FDI and exports, along with other relevant macroeconomic indicators from 1990 to 2024; have been extracted from World Bank data (world development indicators 2024) for Pakistan. The Autoregressive Distributed Lag (ARDL) approach has used to investigate long-run relationships and the Error Correction Model (ECM) to analyze short-run dynamics. There is a negative relationship between FDI and exports in the short run and a significant positive relationship in the long run. Other variables—GDP, relative prices, and domestic demand pressure—also positive and significant and the real effective exchange rate has a negative relationship with exports in both the short and the long run. it is suggested that policymakers should focus on the factors affecting FDI and their relationship with export performance. This can be achieved through effective policy reforms and the creation of a favorable situation for attracting FDI inflows, which can ultimately enhance exports.