#1ICTEDPS: International Conference on Transforming Economic FDI-Export Nexus in Manufacturing Sector of Pakistan Iftikhar Hussain Assistant Professor, Higher Education Department, Government of Khyber Pakhtunkhwa Manzoor Hussain Memon Economist, Social Policy and Development Centre, Karachi Development: Policies and Strategies Applied Economics Research Centre AERC (University of Karachi)#2☑ICTEDPS AERC FDI - Export Nexus ● Almost every developing country of the world aims to frame policies; to promote its manufacturing sectors' productivity and so-on its export. There has always been a debate among economist about the possible relationship between international trade and economic growth; However, due to shortage of resources they face hurdles in the way to achieve their target; 2#3FDI - Export Nexus ☑ICTEDPS AERC The foreign direct investment (FDI) is considered as an effective tool for capital inflow and growth. Hence such resource gap is filled through encouraging FDI in the country. In recent decades, foreign direct investment has received great attention as a growth enhancing component of the developed countries, and less developed countries in particular. Over the last two decades foreign direct investment have grown at least twice as rapidly as trade. 3#4☑ICTEDPS AERC Conceptual Framework ● Foreign Direct Investment (FDI) is defined as an overseas investment which involves a full or partial control of a residing entity in one economy by enterprise resident in another economy; FDI Involves a long-term relationship reflecting an investor's lasting in a foreign entity; Many empirical studies have shown significant role of foreign direct investment in economic growth of host developing countries, through its contribution in human resource development, technological transfer, capital formation, official assistance and international trade. 4#5☑ICTEDPS Conceptual Framework ● AERC This is quite clear from the literature review, that to find out the linkage between the FDI and trade is very difficult and complex to justify; • It depends largely on the types of trade and FDI being considered are basically country-, industry-, and even firm- specific; 5#6Empirical Thoughts ☑ICTEDPS AERC Mostly the step-in approach is used as suggested in different literatures that firms in manufacturing, • In the first instance trade in the foreign market as it is easier and less risky than FDI. After learning more about the economic, political and social conditions, firms may establish producing subsidiaries in the foreign market, and may eventually begin to export. This shows that the trade first cause the FDI and FDI may eventually cause trade (Johanson & Wiedersheim, 1993; Nicholas, 1982; UNCTD, 1996). This is consistent with Vernon's (1966) product cycle hypothesis. 6#7ICTEDPS Economic Development, Exports & ERL CITE Pakistan ● Since independence, the economy of Pakistan had transformed itself; From agrarian i.e. 53.2 percent in 50s to around 21 percent share in 2015; Despite this, many other economic activities including the manufacturing sector revolves around agriculture produce; • Thus there are direct and indirect consequences of any external negative shock on agriculture sector; The share of manufacturing sector in GDP is stagnant over the last so many decades, and remained below at around 13 percent. 7#8ICTEDPS Economic Development, Exports & ERL CITE Pakistan • Pakistan's manufacturing sector is not much diversified, and has limited role in exports due large concentration in low value- added products. 14.6 14.4 14.4 14.3 14.2 14.0 13.8 13.8 13.6 13.4 13.2 13.8 13.6 13.6 13.6 13.5 13.6 13.3 13.2 13.0 12.8 12.6 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 8#9ICTEDPS Economic Development, Exports & ERICITE Pakistan Pak Rs. in Million 1500000 1300000 1100000 900000 700000 FDI MILLION RS EXPORT RS.MILLION 500000 300000 100000 -100000 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Years 6#10ICTEDPS Economic Development, Exports & ERL CITE Pakistan 2013 Leather and Related 5% Foodstuffs; Beverages, an d Tobacco Vegetable Products* 12% Mineral Products 6% 5% Live Animals and Animals Products 3% Textile Value Added 30% 2015 Leather and Related 5% Foodstuffs; Beverages, an d Tobacco 3% Mineral Products 6% Vegetable Products* 13% Live Animals and Animals Products 3% Textile Value Added 36% Other Miscellaneou Other Textile Other Miscellaneou S 25% S 14% 13% Other Textile 21% 10#11✓ ICTEDPS AERC Methodological Framework & Modelling . The variable used in the following model such as FDI, RP and GDP WOR are taken from Sharma (2000), while FDI, GROW and ER were used by Tariq (2006); and RP and GDP WOR were used by Chowdry (2001) as major determinants of exports. Using the variables, the model can be illustrated as: • MEXP = f (MFDI, GDPG, GDP WOR, REER RP), Where, MEXP = Total manufacturing exports of the host country MFDI = Total inflows of FDI in the manufacturing sector. GDP = Gross Domestic Product of the World WOR GDPG = Annual percentage growth rate of GDP REER = Real Effective Exchange Rate RP = Relative Prices (1) 11#12✓ ICTEDPS Methodological Framework & Modelling ti+ - 11 12 ti+ ✗ A ln(MEXP)ta1 + ẞ1 Σ ^ In(MEXP) t − i + ß2 Σ A ln(MFDI) t − i + ß3 11 i=1 11 17 A In (REER) t −1 + $4✗A(GDPG)t-i+ $5 】 Aln(GDPW)t-i + B6 ✗A(RP)t-i i=1 i=1 - i=1 + y1ln(MEXP) + y2ln(MFDI) + y3ln(REER)t — i+y4(GDPG)t - i + y5ln(GDPW)t-i+y6(RP)t- i + εt ... ... ... (2) • ẞ1, B2, B3, B4, ẞ5 and ẞ6 represents the short-run dynamics; y1, 12, 13, 14, 15 and y6 represents the long-run relationship; 12#13• • ☑ ICTEDPS Methodological Framework & Modelling Distributed lags model (ARDL) has become more popular and preferred to other conventional co-integration approaches. ARDL is a two step procedure for investigating long run relationship; In the first step, long run relationship of the variables are checked; The second step is for long run as well as short run co- efficient of the variables are estimated The calculated F-statistic is compared with the two sets of critical values i.e. lower bound values and upper bound values; tabulated by Pesaran (1997) and Pesaran et.al.(2001). 13#14Results & Discussion Test for long run relationship ☑ICTEDPS AERC F statistic 4.307107 Critical Lower bound value Upper bound 1(0) I(1) 1% 3.60 4.90 5% 2.87 4.00 10% 2.53 3.59 Table CI(V) unrestricted intercept & unrestricted trend, (Pesaran.2001) 14#15☑ICTEDPS AERC Results & Discussion Long run coefficients Dependent variable: Ln(Expo) manu Regressors LnFDI Coefficient t-Statistic Prob. 0.217830 2.175244 0.0379 manu LnREER 0.003746 0.890004 0.3808 GDPG 0.070567 1.552711 0.1313 LnGDPW 0.000140 1.801947 0.0820 RP -0.716309 -0.559654 0.5803 C 19.78786 1.128424 0.2684 R-squared 0.876877 Adjusted R - 0.842912 squared F-statistic 25.81703(0.000000) Durbin-Watson 2.172243 15#16Results & Discussion • As indicated in the pervious slide; ☑ICTEDPS AERC • • • manufacturing FDI is positively linked with manufacturing exports; and Annual percentage growth rate of GDP (GDPG) Relative Price (RP) do not affect manufacturing exports, though the coefficients have their expected signs; The affect of Real Effective Exchange Rate (REER) is also insignificant; 16#17Results & Discussion Short Run Coefficients ☑ICTEDPS AERC Dependent variable: Ln(MEXP) Regressors Coefficient t-Statistic Prob. D(LnMFDI) 0.665906 0.494953 0.6250 D(LnREER) -0.000932 -0.109412 0.9137 D(GDPG) 0.067524 1.795108 0.0843 D(LnGDPW) 3.345001 0.469046 0.6429 D(RP) 0.236765 2.554650 0.0168 C -0.140777 -0.552892 0.5851 ECM(-1) -0.391519 -3.350888 0.0025 R-squared 0.565790 Adjusted R-squared 0.398786 Durbin-Watson stat 2.023040 F-statistic 3.387881(0.0059) 17#18☑ICTEDPS AERC Epilogue: The Policy Implication Discussion implies the need of outward export oriented policy for the country; • In the past, the policies mainly attract the service sector; . . • concentration in a specific area have the consequences on stagnant performance of the manufacturing sector and exports; Thus, a balanced approach or weighted scenario should be applied to attract the FDI in the country; 18#19☑ ICTEDPS AERC Epilogue: The Policy Implication ● ● Results suggest that infrastructure based services sector is likely to boost the manufacturing sector performance; Also would have positive and significant impact on the manufacturing sector exports; • The policy makers should review the existing policies and understand the importance of FDI inflow as a source of economic growth and stability; . There is also a need to identify the sectors with in the manufacturing sector which have direct impact on exports sector of Pakistan. 19#20Thank You 20 20