Foreign direct investment and its impact on total factor productivity in Pakistan

![CDATA[This study examines the effect of foreign direct investment (FDI) on the total factor productivity (TFP) of Pakistan in presence of trade openness, human capital, government expenditure and inflation using annual data over the period of 1970 to 2015. Since the variables are co-integrated in the long run, the study uses Johansen co-integration technique and error correction method to examine the long run and short run relationship among the variables. The results suggest that there is a positive and significant impact of FDI on total factor productivity in Pakistan in the long run. FDI inflows bring in new ideas and technologies in the host country exposing the labor to better methods and skills. This causes an increase of the efficiency of the domestic factors of production and the results are consistent with this theory. The results also suggest that trade openness has a positive impact on productivity. Human capital represented by education expenditure is found to have a positive effect on TFP in Pakistan however; government expenditure has a negative effect. This suggests that government spending is not effectively allocated to create an efficient workforce that would result in an increase in factor productivity. Pakistan needs to improve the quality of human capital in order to fully utilize its economic resources. An increase in education expenditure, better healthcare facilities and improved school conditions is a prerequisite to increase the productive capabilities of people.]]