Abstract

This paper quantitatively identifies the impact of trade liberalization on foreign direct investment in Pakistan over the period of 1990 to 2005. The main interest of this study how different variables of trade liberalization affect foreign direct investment in Pakistan. The trade liberalization has been measured through four variables that are custom and other duties, taxes, taxes on income profit and capital gain, and interest payment. The study uses Feasible Generalized Least Squares for estimating the results. The variables custom and other duties and taxes on income and capital gain show the statistically significant impact on foreign direct investment. Taxes and interest payment shows the insignificant impact on foreign direct investment. 1.1 INTRODUCITON The world economy is globalizing and all the countries are experiencing worldwide trade liberalization because in today’s world no country can afford to remain isolated. Trade liberalizations are one of the most important incentives for foreign direct investment and it results in inflow of foreign direct reserves. Trade liberalization and foreign direct investment are disjoined for most of the time. Empirical studies shows that they are inter related. Through trade liberalization standard of living improves, economic growth increases, improve welfare and give rise to new capital inflows because of dynamic and static gains from trade. Static gains outcome from reducing