Impacts of capital inflow on domestic investment in Pakistan

Capital inflow is a dominant and more accepted phenomenon now-a-days which plays a significant role in the growth and development of the economy. Capital inflow is a flow of money in the economy from the external resources which helps to buy and improve the regional capital assets included as technology, buildings, land, machinery etc, also lead to the new productive capacities in the country’s economy, which is very important for the development of the developing countries. Capital inflow leads the investments because money comes into the country from the external sources. This increment in the domestic investment encourages the economic growth in the developing countries just like in Pakistan.

Capital inflow causes the increment of the money in the form of the investment, which increase in the value of the country’s currency because foreigners make investment in the country which causes the exchange of the foreign currency into domestic currency and the demand and value of the currency. Foreign Direct Investment is made by the organization or persons in the foreign countries and it is the important source of the capital which complements the domestic private investment. Investment plays an expressive role in the stability of the economy which nourishes the economic growth. Investment is also said to be a creation of the monetary assets, which provides the more incomes and wealth in the future, that is supportive for the economic condition and for the growth of the economy.

Mobility of the capital in the existing economies takes an active part in the economic development especially in the form of the capital inflow which increases domestic investment successively in a country that encourages the economic growth in a country (Magud.N, 2012). The Capital inflow causes high investment, which increase the aggregate demand and increase in AD leads the economic growth.

The capital inflow fills the gap of the investment in the economy. FDI, loan, portfolio investments are the forms of the capital inflow which gives the rise to the investments in a country. In India (developing country), GDP rate was 7.2%in 1990-91, which was extended due to capital inflow and became 25.8% in 2008-09 which increase to the global integration in the India. By uses the capital inflow (KF), Gross Domestic Capital Formation (GDCF), co-integration. (Ranjan R, Kumar.S.2012).

Investment is said to be ramification of capital inflow in long term because the foreigners makes the investments for a long period of time. An additional or extra dollar of sectional investment induced by the FDI’s each dollar. Foreign capital is sufficient to cloves the gap of production and investment that dominates the growth of the economy. In the transition economies, capital inflow has the biggest part due to the complemented Foreign Direct Investment (FDI) mostly in the developing nations. FDI may exhilarate bit amount of appended investment that penetrate and advance effects that occurs in the economy of the host country (Mileva.E, 2008). In the transition economies, categorically investment rate rise due to the capital inflow. In developed countries people holds the generous savings but return on investments is very prostrate. In developing countries, savings are very short and return on investment is high due to the low amount of capital. So capital inflow which the foreigners invest in the developing countries increases the domestic investments. (Ghose.Ajit K, 2004).

Capital inflow has a directly impact on the domestic investment that is increased by it and also causes a big increment in the economic development of the nation. For the developing countries, the foreign capital inflow is a significant part to increase its resources or investments to grow up the economy. Capital inflow and domestic investment both are the dominant variables which may exhilarate the economy to improve its bad conditions to very improved nation.