Foreign direct investment, trade and migration in a developing country--Pakistan

This dissertation explores the relationship and the determinants of FDI, trade and migration in three empirical studies. The first study estimate the Knowledge Capital model (KK) to explore the determinants and types of FDI in a small developing country, Pakistan. The results indicate that the model fits the data at aggregate and manufacturing sector reasonably well as signs on most of the explanatory variables related to the vertical and horizontal FDI are in line with the predictions of the model. However, there is strong evidence of vertical FDI as the endowment difference variable is positive and significant in most of the specifications suggesting that large countries invest to have factor cost advantage in Pakistan. We also modify the model by using dummy variables for the reform and period of instability. The results provide evidence that liberalization of trade and investment has positive effects on the inflows of both types of FDI and that political and economic instabilities negatively affect FDI inflows. The second essay explores the role of Pakistani migrants in facilitating FDI inflows by reducing informal barriers of trade and investment. In an augmented gravity model based on the new trade theory of the multinational we find significant positive impacts of migrants on FDI inflows in Pakistan both at the aggregate and sectoral levels. We also find that Pakistani immigrants in distant countries are more effective in reducing transaction costs. Among the Commonwealth countries, Pakistani immigrants in the UK have a significant positive impact on FDI inflows in Pakistan. Finally, this study finds that immigrants are effective in promoting FDI from both developed and developing countries, the effects being larger for immigrants in the former. In the third study we estimate the determinants of migration from Pakistan. The unique feature of this research is that we study migration in both OECD and non-OECD countries which is particularly relevant in the case of Pakistan as large number of migrants go to the Middle East countries. Using a modified gravity model, we explain the emigration rate from Pakistan by the income, population density, dependency rate and tertiary rate of education in the host countries. The findings of this study suggest that income in the host country is an important determinant of migration from Pakistan and that high population density and an increase in the rate of tertiary education in the host country discourage migration. The main objective of this study is to look at the impact of previous migrant stock on potential emigration rate from Pakistan. The positive and significant coefficients on lagged migration stock for both OECD and the Middle East countries support the view of the network theory that family and friends who have migrated previously help in migration of potential migrants by providing information and reducing logistics and other costs of migration