“EMPIRICAL ANALYSIS OF URBANIZATION, FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH”

Abstract

Pakistan’s prompt economic development and substantial progression of urbanization, a massive amount of foreign direct investment may play an unimpeachable role. This current study attempts to empirically analyze the dynamic association among the three macro-economic variables: foreign direct investment (FDI), urbanization and economic development, for Pakistan by establishing a Vector Auto-Regressive (VAR) model, using data from 1971 to 2015. The observed results illustrate that there is a cointegration affiliation among the variables. Under the 5% significance level, both FDI and urbanization, and urbanization and economic growth have unidirectional causal relationships among them while there is a two-way directional causality between FDI and economic growth. This study put forward that enhancement of urbanization level may result in attracting more foreign investment in the country, and the inflow of foreign investment can accelerate population in-migration, stimulate clustering of industrial sector and quicken urbanization process, through impulse response function analysis. Urbanization can create adverse social and economic effects if not managed properly, similarly FDI becomes useless and hence growth hindering when host country lacks absorptive capability or fails to make proper use of latest technology and knowledge. Improving domestic infrastructure, managing urban population efficiently and absorbing foreign investment into local capital arcade through proper measures can be helpful in driving Pakistan's economic growth, in long course.