World Applied Sciences Journal 22 (9): 1318-1325, 2013 ISSN 1818-4952 © IDOSI Publications, 2013 DOI: 10.5829/idosi.wasj.2013.22.09.257 Corresponding Author: Rab Nawaz Lodhi, Department of Management Sciences, E-8, Bahria University, Islamabad, Pakistan. Tel: +92-51-9260002. 1318 Empirical Investigation of the Factors Affecting Foreign Direct Investment in Pakistan: ARDL Approach Rab Nawaz Lodhi, Muhammad Ayub Siddiqui and Umie Habiba 1 1 2 Department of Management Sciences (Graduate Studies), E-8, Bahria University, Islamabad, Pakistan 1 Department of Economics, Government Islamia College, Railway Road Lahore, Pakistan 2 Abstract: This study investigated the impact of Electricity Production, Industrial Value Addition, GDP and Gross Capital Formation on Foreign Direct Investment in Pakistan. For finding the long run and short run relationship between different economic factors and FDI Inflow, ARDL approach to co-integration has been used on the time series data of Pakistan from 1976 to 2010. Findings of the study show, in the long-run, Gross Capital Formation and Electricity Production has significant and positive impact on FDI inflow. Findings also suggest, in short-run, previous year Industrial Value Addition and current year Industrial Value Addition positively affects FDI inflow in Pakistan. Based on these finding study draws the conclusion that there is a need of FDI inflow in Pakistan and if the local investor makes investment in Pakistan then it will encourage foreign investor to come and invest in Pakistan. Moreover, due to shortage of electricity production, the volume of FDI Inflow is decreasing year by year and Government of Pakistan should produce more electricity to attract more FDI inflow. Industrial contribution and value addition also attract FDI inflow in Pakistan. Therefore, Government should take the corrective action for industrial development. Key words: Determinants Foreign Direct Investment Autoregressive Distributed Lag (ARDL) INTRODUCTION country. Employee performance enhances through Foreign Direct Investment (FDI) is the investment Mostly foreign companies hire local staff of host country made by multinational business enterprises in foreign and provide a large range of employment opportunities for countries to control assets and production activities [1]. local employees and workers. Multinational Companies There are different factors that attract FDI in the host (MNCs) give direction to the Local Government in policy country. Dunning [2] identified four factors: Resources, making. Local Government improves policies and quality market growth, efficiency of host country and strategic of business environment to attract more foreign motivators. Resources include high skilled manpower, investment. Friendly and liberal policies of trade give an infra-structure, energy resources, efficient transportations opportunity to foreign investor to invest freely in the host and effective means of communication. Market growth country. means the future sustainable expected growth of the Location specific advantage also attract FDI in the markets in host country. Efficiency means cost efficiency specific areas of the host country. Some countries are of production and strategic motivator means sustainable enrich in petrolium products while some areas are popular advantage in the host country for the long period of time. for automobiles. Therefore, foreign invester looks for the Quality of human capital and availability of more skilled efficiency of resources to get maximum output. Foreign manpower also attracts FDI in the country. investor not only brings new systems but also new Host country enjoys many benefits. Through technologies of production. Location specific advantages collaborative strategies, multinational companies e.g., availability of labor, resources, electricity, natural improve efficiency of local firms. FDI also introduces resources, the reason for more or less FDI inflow in the new knowledge based capital equipments in host host country. effective training programs by new investors.