Internal Absorption and Foreign Direct Investment Inflows: A new approach towards Market Size

Mushtaq AHMAD, Ferhan K. AHMAD, Muhammad Ali NASIR, Gulzar KHAN


Abstract. In continuation of the efforts to understand the dynamics of internal market, this study proposes Internal Absorption as an instrument for measuring market size for economies which confront large trade deficit over a longer period of time. The study empirically examines the impacts of Internal Absorption along with trade openness and gross private investment on FDI inflows in Pakistan. The ARDL approach to co-integration and ECM based on ARDL is used to test the existence of long run relationships among variables for the period 1976-2009. The result establishes strong positive relationship between Internal Absorption and FDI inflows in short as well as in the long run.

Keywords. Foreign direct investment, Internal absorption, Trade openness, Private investment.

JEL. F18, F21, F23, O47.

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