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 Farooq

MBFF12E105

Muhammad Kamran Mujtaba

MBFF12E103

Muhammad Ali Husnain

MBFF12E117

Muhammad Usman

MBFF12E140

Foreign Direct Investment (FDI) and Its Effects on Productions of

Crude Oil and Natural Gas in Pakistan
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

Foreign Direct Investment (FDI) and Its Effects on Productions of

Crude Oil and Natural Gas in Pakistan
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 below
1. Augmenting domestic saving and investment
2. It helps to transfer of technology from the leaders
3. It increase the competition in the host country domestic market
4. Exports increases and due to this earning of foreign exchange increase
5. Host countries markets competes in international market very important for Pakistan

Foreign Direct Investment (FDI) and Its Effects on Productions of

Crude Oil and Natural Gas in Pakistan
Too much foreign investment has dangerous impact on host countries and creates certain losses
that are given below
1. Funds repatriate almost to the same extent as it brings in funds
2. Technology transfer that are inappropriate for the host countries
3. It target primary to the domestic market of host countries and hence no increase in exports
4. Policies of host countries distortion due to benefits of foreign investor
5. It create distortion in economic and social structure of host countries by inducing
inappropriate norms and values
There 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 3 rd 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

Foreign Direct Investment (FDI) and Its Effects on Productions of

Crude Oil and Natural Gas in Pakistan
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:

Does foreign direct investment have impact on the production of crude oil in Pakistan?
Does foreign direct investment have impact on the production of natural Gas in Pakistan?

3. Objectives of the study:

1
2

Identify the impact of direct investment on the production of crude oil in Pakistan.
To identify the impact of foreign direct investment on the production of natural Gas in

3
4

Pakistan.
To provide the guidance to the foreign and local investor to invest in oil sector.
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:

Foreign Direct Investment (FDI) and Its Effects on Productions of

Crude Oil and Natural Gas in Pakistan
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
6

Foreign Direct Investment (FDI) and Its Effects on Productions of

Crude Oil and Natural Gas in Pakistan
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.
7

Foreign Direct Investment (FDI) and Its Effects on Productions of

Crude Oil and Natural Gas in Pakistan
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.

Foreign Direct Investment (FDI) and Its Effects on Productions of

Crude Oil and Natural Gas 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)
N

Minimu
m

Maximu
m

Mean

Std
Deviation

Range

MEDIA
N

FDI

35

-0.4070

0.94406

0.39141

PCO

35

-0.1014

0.84210

PNG

35

-0.09492

0.17273

0.194
13
0.077
62
0.053
78

1.351
12
0.943
50
0.267
65

0.14014
2
0.03636
3
0.05763
1

0.17317
0.04968

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.

Foreign Direct Investment (FDI) and Its Effects on Productions of

Crude Oil and Natural Gas in Pakistan

9. The Correlation Coefficient Analysis:

Table-2: Pearsons Correlation Coefficient between predictor variables

FDI return
FDI return

Crude Oil return

Natural Gas return

0.318920348

0.116600993

Crude Oil return

0.318920348

-0.155315263

Natural Gas return

0.116600993

-0.155315263

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.

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Foreign Direct Investment (FDI) and Its Effects on Productions of

Crude Oil and Natural Gas in Pakistan
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+e
Where,
FDI = Foreign Direct Investment
PCO = production of crude oil
PNG = Production of natural gas
E

= error term

=constant term

B1

=parameter of PCO

B2

=parameter of PNG

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Foreign Direct Investment (FDI) and Its Effects on Productions of

Crude Oil and Natural Gas in Pakistan
Significance level are used as 5 %.

The following tables present the results of regression analysis.

Table-3.1: Regression Model Summary
Regression Statistics
Multiple R

0.360545447

R Square

0.129993019

Adjusted R Square

0.075617583

Standard Error

0.376329435

Observations

35

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 R 2 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.
.

12

Foreign Direct Investment (FDI) and Its Effects on Productions of

Crude Oil and Natural Gas in Pakistan
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: SUGGESTION
13

Foreign Direct Investment (FDI) and Its Effects on Productions of

Crude Oil and Natural Gas in Pakistan
On 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.

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Foreign Direct Investment (FDI) and Its Effects on Productions of

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

Crude Oil and Natural Gas in Pakistan
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