Macroeconomic Performance of Pakistan: The Role of Foreign Direct Investment and Institutional Quality

Abstract

This study investigates the influence of FDI and institutional quality on the macroeconomic performance of Pakistan using annual time series data from 1996 to 2022. In this study, the macroeconomic performance of Pakistan is measured using three variables including GDP, trade, and environmental performance. Different econometric techniques are used for data analysis, such as ADF test, bound test, and ARDL model for the long-run parameters estimation. The study shows that FDI, human capital and globalization are positively and significantly linked to the GDP, while institutional quality is negatively related to the GDP in Pakistan. Similarly, the results also show that FDI, institutional quality and GDP are positively and significantly associated with CO₂ emissions, while human capital is also positively but insignificantly related to the CO₂ emissions in Pakistan. In addition, institutional quality and exchange rate are negative and significant, while FDI is positive and significant factors of trade in Pakistan. The findings suggest that to enhance GDP growth, the government should continue attracting FDI and investing in human capital and globalization-friendly policies. However, the negative impact of institutional quality on GDP and trade indicates a need for institutional reforms to improve governance and regulatory effectiveness. Additionally, since FDI and GDP are linked to higher CO₂ emissions, environmental regulations must be strengthened to ensure sustainable development. Exchange rate stability is also crucial for promoting trade performance.