What Determines Private Investment? The Case of Pakistan

Abstract

This study is an attempt to analyse the determinants of private investment in Pakistan over the period 1972-2005. The ARDL co-integration approach is employed to check the existence of a long-run relationship as well as short-run dynamics of investment. The results show that most traditional factors have little or no impact on private investment. These results may support the idea that non-traditional factors such as quality of institutions, governance, entrepreneurial skill, etc., are prerequisites for private investment to flourish. We find partial support for the accelerator principle and the crowding-out hypothesis in the case of Pakistan. However, the hypothesis that the volume of the funds is as important as the cost of the funds used in financing private investment and the McKinnon-Shaw hypothesis are not verified in the case of Pakistan.