Absorptive Capacity in Optimum Internal Utilization of Foreign Direct Investment in Pakistan

Abstract

This paper examined the effect of Absorptive Capacity (ABC) on Foreign Direct Investment (FDI) in optimum internal utilization using Auto Regressive Distributed Lag Approach (ARDL). The results reveal the relevancy of human capital, patent application, electricity consumption, inflation, number of Doctor of Philosophy (Ph.D.), and trademark as determinants of FDI in Pakistan. In long run FDI is determined by human capital, patent right application, number of PhDs, electric power consumption, inflation, and trademark application while in short run lagged inflation and lagged trademark applications are the relevant arguments. An increase in human capital, patent application, and electricity consumption augments growth process of Pakistan, whereas a rise in the number of PhDs and trademark application retards growth process. Based on empirical evidence, it is recommended that the relevant authorities should formulate policies that augment factors causing FDI inflows and control those that retard it.