Inter-linkage between Foreign Direct Investment and Foreign Trade in Pakistan: Are they Complements or Substitute?

This study tries to investigate the inter-linkage between foreign trade and Foreign Direct Investment (FDI) in case of Pakistan. Annual data for the period 1985–2010 have been considered for eight major trading partners—Canada, France, Germany, Hong Kong, Japan, Saudi Arabia, UK and USA. The Johansen Fisher Panel Cointegration Test and Vector Error Correction Mechanism (VECM) have been applied to examine whether the FDI and foreign trade are complements or substitutes. The analysis gives evidence in favour of complementarity of FDI and foreign trade i.e., FDI promotes Pakistan’s foreign trade with its trading partners.