Syed Hasanat SHAH*, Hafsa HASNAT** and Muhammad Arif KHAN***
Pakistan, a developing country, desperately looked for foreign investment in order to promote growth and investment. Pakistan introduced a number of policy measures in the last few decades and attracted substantial foreign investments. But it is not clear whether foreign investments inflows in Pakistan played any role in growth and development in Pakistan? This study employs a system of equations to investigate the nexus between FDI, portfolio and domestic investment in Pakistan. The main objective of this research is to measure the impact of foreign direct, portfolio investment and other forms of capital inflows on domestic, especially on private investment, in Pakistan. The results show that FDI inflows promoted domestic investment in Pakistan, where FDI and domestic investment reported a one-to-one relationship. The findings of the study also confirm that domestic investments contribute to FDI inflows; thus, FDI and domestic investment mutually cause each other. On the other hand, portfolio investments play an insignificant role in determining domestic investment in Pakistan. This shows that compared to portfolio investment, Pakistan needs to focus on foreign direct investment inflows for promoting growth and private investment at home.
Keywords:FDI, Domestic Investments, Portfolio Investment, Pakistan, System of Equations.