Foreign Direct Investment (FDI) and Its Effects on Productions of Crude Oil and Natural Gas in Pakistan

Foreign Direct Investment (FDI) and Its Effects on Productions of Crude Oil and Natural Gas in Pakistan

Foreign Direct Investment (FDI) and Its Effects on Productions of Crude Oil and Natural Gas in Pakistan

Muhammad Usman FarooqMBFF12E105Muhammad Kamran MujtabaMBFF12E103Muhammad Ali HusnainMBFF12E117Muhammad UsmanMBFF12E140

ABSTRACT

In Pakistan Foreign Direct Investment (FDI) is one of the major external sources of funding to meet obligations of resources gap and goal achievement. FDI contributed significantly in the human resources development, capital formation, and organizational and managerial skills of the people in the country. This research paper aims to analyze the impact of Production of crude oil and Production of Natural gas due to foreign direct Investment (FDI) in Pakistan for the period 1980 to 2015. It evaluated the production of crude oil in Pakistan and production of natural gas in Pakistan and assessed the historical trends of the FDI in Pakistan. The link between production of crude oil, production of natural gas and foreign direct investment is measured with the help of multiple regression models. In the model PCO and PNG is used as independent variables and FDI used as a dependent variable and according to the results, the model is overall insignificant with the positive and significant association of PCO and FDI and also insignificant relationship found between PNG and FDI. Foreign direct investment (FDI) is an essential factor for economic growth in the developing countries. FDI allows the transfer of technology, uplift competition in the domestic input market, contributes to human capital development.

Keywords: FDI, PCO, PNG

I. Introduction: Foreign direct investment (FDI) means to participation by a one country into another country. In case of Pakistan when other countries invest in many sectors like agriculture, mining, food, sugar, textile etc. This normally includes participation in management, joint-venture, transfer of technology and expertise. Two main types of FDI are used: inward foreign direct investment and outward foreign direct investment, and resulting in a net FDI (positive or negative) inflow. Foreign direct investment (FDI) includes foreign ownership of productive assets, such as textile factories, mines and land. Due to increasing foreign investment one country can competing an international level and hence FDI is an important measure of increasing globalization.Any shape of Investment brings a progressive outcome in an economy, May on national level or international level. Now a days foreign direct investment (FDI) is very important part of international economics.IN case of Pakistan where markets and economy are developing so in this case Pakistan is much need of foreign investment. Because of foreign investment Pakistan increases economic growth, Developing and enhancing the managerial skill, employment level, and technology and increase standard of living. Pakistan that is developing country is need that foreign investor wealth come there country. Pakistan develops policies to attract the foreigner investor to increase the GDP, PCI etc. Many benefits of FDI is given below1. Augmenting domestic saving and investment2. It helps to transfer of technology from the leaders3. It increase the competition in the host country domestic market4. Exports increases and due to this earning of foreign exchange increase5. Host countries markets competes in international market very important for Pakistan Too much foreign investment has dangerous impact on host countries and creates certain losses that are given below1. Funds repatriate almost to the same extent as it brings in funds2. Technology transfer that are inappropriate for the host countries3. It target primary to the domestic market of host countries and hence no increase in exports4. Policies of host countries distortion due to benefits of foreign investor5. It create distortion in economic and social structure of host countries by inducing inappropriate norms and valuesThere are certain benefits and losses but overall researcher shows the positive impact of foreign direct investment on the economic growth of developing countries. In Pakistan many types of factor affect FDI such as social, Political and economic.In any country economy oil and gas is most important factor because it directly links to the overall worlds economy .This is the reason that any variation in oil prices brings a quickly change in all other macro-economic variables. The sector of oil and gas in Pakistan now rising and working hard to fulfill the demand of country oil and gas are two of the key components of energy mix. With respect to evidence of last Economic survey 2013, Pakistan estimated that 29 million of barrels of reserves are available in Pakistan. It is recoverable for the use and Pakistan consumption are 20.23 million tones. In Pakistan the average oil productions are 66032 barrels per day in 2013 and is was growth of around 13% over the last year. Total 7 oil refineries 6772 petrol stations are operating in Pakistan and 258 oil and gas discoveries and 803 well drilled till now.

Oil industry profit is increase in ninth month or 3rd quarter of fiscal year 14 while it was decreasing before. Earning of oil and gas explorers increase by 18% in third quarter of fiscal year while in previous quarter ended in Dec 2013 the earning of sector declined due to appreciation of Pak ratio against dollar. Research paper is identifying or analyzes the impact of foreign direct investment (FDI).In Pakistan for the period 1980 to 2015and to observe the relationship between production of crude oil and production of natural gas due to foreign direct investment.

2. Research Questions:1. Does foreign direct investment have impact on the production of crude oil in Pakistan?1. Does foreign direct investment have impact on the production of natural Gas in Pakistan?

3. Objectives of the study:1. Identify the impact of direct investment on the production of crude oil in Pakistan. 1. To identify the impact of foreign direct investment on the production of natural Gas in Pakistan. 1. To provide the guidance to the foreign and local investor to invest in oil sector.1. To increase our knowledge about the important sector of Pakistan.

4. Significance of the study:This research paper will contribute to the literature because we have not seen any study in Pakistan in which the effect of production of crude oil and production of natural gas due to FDI (foreign direct investment). Literature about FDI given in many studies and FDI impact in many sectors also given but in oil sector researcher not paid any attention.

5. Literature Review:In the context of FDI many studies shows the relationship between economy growth due to FDI, but this study is main focus on the relationship between production of crude oil , production of natural gas due to FDI in Pakistan. We know that FDI have impact on every sector in every country including agriculture, services, oil and gas refinery, textile industries but much researcher main focus is analysis the relation between FDI and economic growth in both developing and developed countries. Dr Gaber Muhammad Abdel Gawad and Dr. Venkata Sai Rao Muramalla work on relationship between FDI and oil, gas and refinery production and exports of them selected seven regions in the world. In this study they find there is positive relationship between FDI and refinery capacity (RC) and there is insignificant relationship between FDI and production of crude oil in12 countries so FDI and conclude PCO not effected by FDI.Fallki (2009) done the work on the impact that FDI had on the economic Development of Pakistan. He used the endogenous theory of growth and regression analysis then he was able to conclude that there is statistically negative relationship between FDI and domestic product in the country. He gathered data of FDI from the website of Pakistan economy from 1980 to 2006. Adam & Tweneboah (2009), economists from Ghana, conducted an independent study on the FDI and stock market development in the country concludes that in Ghana that there is positive impact of FDI on the development of the stock market and economy.Next study done by the Udoh M. Dominic economic department of college of education Gabor, delta state Nigeria find the relationship Foreign direct investment and oil export on economic growth in Nigeria from 1970 - 2011 the test shows that foreign direct investment is not statistically significant in explain the level of economy activity as a result of non conducive environment for investment as well as oil theft. And there is no significant relationship between FDI, oil export and the Nigerian economy.(Ian Nay & Abdul Khaaliq 2007), which use the sect oral data for foreign direct investment inflows to the Indonesia for the period of 1997-2006 to investigate the impact of foreign direct investment on economic growth. In the aggregate level, FDI is observed to have a positive effect on economic growth. Estimation shows that the foreign direct investment shows the positive impact on the few sectors and has robust effect on the some sectors like mining and quarrying.(Abbas, 2011) another researcher, he examined that on the effect of FDI and CPI on the GDP member nations of SAARC. The study examined that the usual model of these countries have a positive impact between Foreign Direct Investment and GDP while negative impact between Consumer Price Index and GDP. However, as per the World Investment Report 2012, FDI inflows increased in all economic groups developing, developed and transition economies. In Developing countries accounted for 46 per cent of global FDI inflows in 2011. Besides, in the findings of Fabien Boudier-Bensebaa, in the Central and Eastern European Countries (CEECs), FDI is expected to play an important role in their transition from a centrally planned economy to a market system. Another study done by John C. Anyyanwu estimated the results from cross-country regressions for the period 1996-2008 indicate that: (a) there is a positive relationship between market size and FDI inflows; (b) openness to trade has a positive impact on FDI flows; (c) higher financial development has negative effect on FDI inflows; (d) the prevalence of the rule of law increases FDI inflows; (e) higher FDI goes where foreign aid also goes; (f) agglomeration has a strong positive impact on FDI inflows.

6. Data and Methodology:This section provides information about the source of data, sample size, measurement of the variables and discussion of different measures of the variables.6.1. Source of Data:This study is based on the financial data of sample firms from 1980-2015 and has been taken from the website of State Bank of Pakistan and Pakistan statistic of economic. FDI data has been taken from website of State Bank of Pakistan and production of crude oil and production of natural gas data has been taken from Pakistan index mundi. 6.2. The Sample:For this study we have selected Pakistan crude oil sector and FDI data from the website of State Bank of Pakistan for the period of 1980 to 2015.we have selected these variables.6.3. Dependent variable: Foreign Direct Investment (FDI)6.3.1 Independent variables: Production of crude oil Production of Natural Gas

7. Hypothesis:Thus our two hypotheses that we will test are:7.1. Hypothesis a Hao: There is no relationship between Foreign Direct Investment (FDI) and Production of crude oil sector in Pakistan. Ha1: There is a possible positive relationship between Foreign Direct Investment (FDI) and Production of crude oil sector in Pakistan.7.2. Hypothesis b Hbo: There is no relationship between Foreign Direct Investment (FDI) and Production of Natural Gas sector in Pakistan. Hb1: There is a possible positive relationship between Foreign Direct Investment (FDI) and Production of Natural Gas sector in Pakistan.

8. Descriptive Statistics :( Analysis and results)Descriptive analysis and quantitative analysis have been performed in our study. The results of which discussed here, this section contains the results of the descriptive statistics. Table 1 shows the results of descriptive statistics for the variable values in the sample. Table-1: Descriptive Statistics (35-year summary)NMinimumMaximum Mean Std DeviationRangeMEDIAN

FDI35-0.40700.944060.194130.391411.351120.140142

PCO35-0.10140.842100.077620.173170.943500.036363

PNG35-0.094920.172730.053780.049680.267650.057631

The descriptive statistics for FDI, Production of crude oil(PCO) and Production of natural gas(PNG) of Pakistan for a period of 35 years from 1980-2015. The mean of Foreign Direct Investment (FDI) is 19.413% and median value of foreign direct investment is 14.01% which is center value of data and standard deviation is 39.141%. These results show that Foreign Direct Investment (FDI) can deviate by 39% from both sides. The maximum value of Foreign Direct Investment (FDI) is 0.94406 and minimum value is -0.40705 and range value is 1.35112. The mean of Production of crude oil (PCO) is 0.07762 and median value of PCO is 0.03636363 and standard deviation is 0.17317. These results show that Production of crude oil (PCO) can deviate by 17% from both sides. The maximum value of Production of crude oil (PCO) is 0.84210 and minimum value is -0.1014 and range value is 0.94350.The mean of Production of natural gas (PNG) is 0.053788 and median value is 0.05763 which shows the center value of the data and standard deviation is 0.04968. These results show that Production of natural gas (PNG) can deviate by 4.96% from both sides. The maximum value of Production of natural gas (PNG) is 0.17273 and minimum value is -0.09491 and range value is 0.26765.

9. The Correlation Coefficient Analysis: Table-2: Pearsons Correlation Coefficient between predictor variablesFDI returnCrude Oil return Natural Gas return

FDI return10.3189203480.116600993

Crude Oil return 0.3189203481-0.155315263

Natural Gas return0.116600993-0.1553152631

Pearsons correlation analysis is used for data to see the relationship between dependent and different independent variables. Like FDI and Crude oil production, liquidity, natural gas production etc. The correlation results of FDI and Crude oil production shows a positive and significant relationship with coefficient0.3189 and its P. value is (0.04600). It shows that if FDI increases than Crude oil production will also increase and vice versa. The results of correlation of FDI and Natural gas production are positive with value of 0.1166 and P. Value is (0.3154) which shows FDI have insignificant impact on Natural Gas production. The correlation results of Crude oil production and Natural Gas production show negative but significant relationship with a value of -0.1553.

10. The Regression Model:Relationship between foreign direct investment, production of crude oil and production of natural Gas are identifying with the help of multiple regression models. In this model FDI is used as dependent variable whereas production of crude oil and production of natural gas are measured as independent variables.Main purpose of this research paper is to examine the relation of FDI with production of crude oil and production of natural gas. Study covers the time period from 1980-2015. World bank is consider a good source of data collection and other or secondary variable production of crude oil and production of natural gas of data collect from KSE website and state bank of Pakistan (SBP) and index mundi. Examine the relation of FDI and PCO and PNG the following theoretical model are used.FDI= F (PCO&PNG)To examine the relation of Pakistan's production of crude oil and production of natural gas with FDI , then we used the following multiple regression equation are used FDI = a + b1 PCO + b2PNG+eWhere,FDI = Foreign Direct InvestmentPCO = production of crude oilPNG = Production of natural gasE= error termA =constant termB1=parameter of PCOB2=parameter of PNG Significance level are used as 5 %.

The following tables present the results of regression analysis. Table-3.1: Regression Model SummaryRegression Statistics

Multiple R0.360545447

R Square0.129993019

Adjusted R Square0.075617583

Standard Error0.376329435

Observations35

a. Predictors: (Constant), COP,NGP

b. Dependent Variable: FDI

The factors which affect the profitability are analyzed for all 35 observations. The regression results show that determination results shows that determinants of foreign direct investment have impact on Production of crude oil with R2 value 0.12999. The r-square of this model is 0.12999 that means almost 87% variation in the model is unexplained by PCO and PNG whereas remaining variation (13%) is explained by FDI and PCO and hence overall model is insignificant. P value is 0.04669 which is less than 0.05 so it proves that there is significant and positive relationship between PCO and FDI and we accept the alternative hypothesis that there is significant and positive relationship between PCO and FDI. Next p value is 0.3154 which is greater than 0.05 so in this case we accept the null hypothesis that there is no relationship between FDI and PNG. .

11: Conclusion:Foreign Direct Investment (FDI) has become an important growth factor in the globalization of the world economy. Countries that experienced faster growth rate of PCO were considered successful and have been attracting larger amount of FDI. In developing countries FDI was helpful to reduce the Saving-Investment gap. When Multinational Companys makes decision to expand its business to another country then it mostly based on low production cost, high efficiency cost, availability of strategic raw material and emerging market. Economic benefits of FDI were wide-ranging; it opened new way of knowledge, training of manpower, transfer of technology, market networking and many other spillover effects and externalities in the host countries. Numbers of the developing countries like Pakistan have taken effective policies and economic reforms to attract foreign investments including FDI. But the local conditions can restrict the potential benefits produced by FDI despite of instrumental policies. Many theoretical and empirical research studies were conducted at national and international level related to FDI and most of them were reviewed in the literature.This research study empirically link between foreign direct investment (FDI,) Production of crude oil and Production of natural gas is measured with the help of multiple regression models. FDI in this model is used as dependent variable whereas PCO and production of natural gas (PNG) are measured as independent variables. According to the results, the model is overall significant with the positive and significant association of FDI and PCO. Here we must understand that it is the responsibility of the local government to devise policies and strategies in such a manner that would support the efforts and investments being made.For a country like Pakistan, the need to concentrate on infrastructure development, human resource training, encouraging local entrepreneurs, creation of a stable macroeconomic environment and ensuring opportunities that would be conducive for investors and provide solution to the developmental process.

12: SUGGESTIONOn the basis of this studys results, the following recommendations for the long-run economic benefits of FDI in Pakistan: Friendly environment should be provided to foreign investors to attract more FDI. Foreign investor should be given more incentives for the transfer of technology to host country. Due to this local enterprises also expended. For Pakistan import-substitution policy related FDI may prove good.

REFERENCES:Anyanwu, John C. (2012), Why Does Foreign Direct Investment Go Where It Goes? New Evidence from African Countries, Annals of Economics and Finance, Vol. 13, pp. 431 462.Bergstrand, et, al., (2007) A knowledge-and-physical-capital model of international trade ows, foreign direct investment, and multinational enterprises. Journal of International Economics 73(2), 278-308.Abbas, Q., Akbar, S., Nasir, A., Amanullah, H. & Naseem, M. (2011) Impact ofForeign Direct Investment.Global Journal of Management and Business Research,Volume 11 Issue 8 VersionAwan, M., Khan, B. & Zaman, K. (2010) A Nexus between Foreign Direct Investment & Pakistan's Economy International Research Journal of Finance and Economics Issue 52, page 1450-2887Alfaro et al. (2006), How does Foreign Direct Investment promote economic growth? Exploring the effects of financial markets on linkages NBER Working Paper 12522, September 2006.Government of Pakistan, Statistical Bulletin (different issues). State Bank of Pakistan Karachi. Granger, C. W. J. (1981), Some properties of time series data and their use in Econometric Model Specification. Journal of Econometrics, Volume 16(1), pp. 121-130.E. Borensztein, J. De Gregorio and J-W. Lee, How Does Foreign Direct Investment Affect Economic Growth, Journal of International Economics, 45, (1998), 115-135.S.S. Makki and A. Somwaru, Impact of Foreign Investment and Trade o n Economic Growth: Evidence from Developing Countries, American Journal of Agricultural Economics, 86, (2004), 795-801.Arshad and Shujaat, Foreign Direct Investment and Economic Growth in Pakistan: Sectoral Analysis, PIDE Working Paper, 67, (2011).M. Agosin and R. Mayer, Foreign Direct Investment: Does It Crowd in Domestic Investment? United Nations Conference on Trade and Development Geneva, Switzerland, Working Paper, 146, (2000).Anyanwu, John C. (2012), Why Does Foreign Direct Investment Go Where It Goes? New Evidence from African Countries, Annals of Economics and Finance, Vol. 13, pp. 431 462.Dabour, Nabil Md. (2000), The Role of Foreign Direct Investment (FDI) in Development and Growth in OIC Member Countries, Journal of Economic Cooperation, Vol. 21, Issue 3, pp.27-55.Kuntluru, S. et. al. (2012), Foreign Direct Investment and Export Performance of Pharmaceutical Firms in India: An Empirical Approach, International Journal of Economics and Finance, Vol. 4, No. 5; May 2012, P.216.Summer, Andrew (2005), Foreign Direct Investment A Critical Perspective A Re-Define Working Paper, Report on Is FDI good for the poor? -A review and stock take, Development in Practice, Volume 15, June 2005.

13