Analyzing the Effect of Institutional Quality and Foreign Direct Investment on Economic Growth of Pakistan

Abstract

This study analyzes the influence of institutional quality and foreign direct investment on the economic growth of Pakistan using data from 1996 to 2023. The ADF unit root test, bound test of cointegeration and ARDL model are applied for data analysis. The results show that FDI is positively and significantly impacting the economic growth, while institutional quality negatively impacts the economic growth of Pakistan. Furthermore, the study shows that labor force, human capital, and gross fixed capital formation are positive factors of economic growth in Pakistan. Based on the results, it is suggested that Pakistan should strengthen policies to attract and sustain FDI while urgently reforming institutions to reduce inefficiencies and corruption. Improving institutional quality is essential to ensure FDI's positive effects translate into inclusive, sustainable economic growth and maximize the benefits of labor, human capital, and capital formation.