ijcrb.webs.com INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS AUGUST 2012 VOL 4, NO 4

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1 IMPORTANCE OF INVESTMENT FOR ECONOMIC GROWTH: EVIDENCE FROM PAKISTAN Najid Ahmad*, Muhammad luqman**, Muhammad Farhat Hayat* *Bahauddin Zakariya University, Multan, Sub-Campus Dera Ghazi Khan, Pakistan **Bahauddin Zakariya University, Multan, Sub-Campus Layyah, Pakistan Abstract: This paper shows the importance of investment and assesses the effects of investment on Gross Domestic Product of Pakistan. A time series data has been used for the period of 1971 to GDP is taken as dependent variable and investment as independent variable. Augmented Dicky Fuller test has been used to check the stationary of the variables and both variables found stationary at level. Granger Causality test and Ordinary Least Squares method has been used to check the relationship between variables. The results of Granger Causality test show GDP does Granger cause investment and investment Granger causes GDP. In this way bi-directional relation has been found. The results of OLS show positive relation between investment and GDP of Pakistan. One percent increase in investment will raise GDP by 0.89%. This shows the importance of investment. Goverment of Pakistan should spend most of its budget on productive tasks that lead to economic growth. Goverment should also encourage investors at national and international level as it is necessary for the prosperity of Pakistan. Keywords: (Investment, Economic Growth, OLS, Pakistan) Introduction The basic aim of this paper is to reinvestigate the relationship between economic growth and investment of Pakistan. Investment spending makes direct contribution to economic activity because investment is the most volatile component of GDP. Investment plays vital role in the long run and short run growth. It links the present with the future. Investment is the part of overall financial planning. If we have some savings, we will try to invest to maximise return. Steven Haggblade (2007) says investment in agriculture is necessary for rapid growth and poverty reduction. However, major keys are necessary for agricultural growth like technological research etc. In Africa 75% of the labor force is in agriculture sector. Najid Ahmad (2012) finds the relationship among inflation, investment, population, exports and GDP of Pakistan. He takes GDP as dependent variable and others as independent variables. For his analysis he uses Johansen Cointegration method and finds positive and significant relationship between GDP and investment of Pakistan. He says one percent increase in investment will raise GDP by 0.32 percent. He suggests Goverment of Pakistan should encourage investment as it is necessary for the progress of the country. Najid Ahmad (2012) shed light on the importance of primary education as it is necessary for economic growth of Pakistan. He thinks education as a key factor for the development of Pakistan. Further he adds that we can progress and keep pace with the world if we give much attention to education. Goverment should invest more on educational sector for the development of Pakistan. He suggests number of enrollment and number of teachers should be increased at primary level for the development. Psacharopoulos (2002) finds higher return to investment in education. The changing have been made with the passage of time as new econometrics technique were introduced. He reviews and presents the latest estimation and patterns. He says that investment in education behaves similar as investment in physical capital. Iqbal Mahmood (2011) favors our findings by saying that investment is an important source of economic growth. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 680

2 Abu Nurudeen (2010) investigates the relationship between foreign direct investment and economic growth. He finds positive relation between FDI and Economic Growth in Nigeria. Najid Ahmad (2012) says education is necessary for economic growth. He views spending on education must be enhanced for the progress of the country. He uses time series data for the period of 1980 to 2009 and finds positive relation between education and economic growth of Pakistan at secondary level. Mahar (2008) and Falki (2009) also favors our findings. Objectives The basic aim of this paper is to find the relationship between investment and economic growth of Pakistan. Hypothesis H 0 : There exists no relation between investment and GDP of Pakistan. H 1 : There exists positive relation between investment and GDP of Pakistan. Data Collection and Methodology In order to study the impact of total investment on Gross Domestic Product of Pakistan, a time series data has been used for the period of 1971 to The data on these variables has been collected from Economic Survey of Pakistan, World Development Indicator (WDI) and IFS (International Financial Statistic). The Cobb Douglas Production Function with constant returns to scale can be written as: GDP=αInv β1 μ (1) GDP is Gross Domestic Product of Pakistan, α is the total factor productivity, Inv is the total investment in Pakistan, β 1 is the coefficient of investment, μ is the white noise error term. The multiplicative form of equation can be in linear form if we take its log from both sides. LOGGDP=LOGα+β 1 LOGINV+LOGμ (2) LOGGDP is the log of Gross Domestic Product, LOGα is the intercept that is equal to β 0, β 1 is the coefficient of LOGINV while LOGINV is the log of investment and LOGμ is the log of white noise error term that is assumed 1. Expectation: B 0 >0, B 1 >0. The Granger causality test can be specified as follows: LOGGDP=ΣϕiLOGINVAt-1+ΣϴjLOGGDPt-1+μt (3) LOGINV=ΣαiLOGINVtAt-1+ΣdjLOGGDPt-1+μt (4) Expectation: ϕi<0, ϴj>0, αi<0 and dj>0 COPY RIGHT 2012 Institute of Interdisciplinary Business Research 681

3 Initially, a famous technique, Augmented Dicky-Fuller test has been used to check the unit roots of the variables so that it can be seen what technique is appropriate for the model. The results of ADF test are as: Table: 1 Results of Augmented Dickey-Fuller variable Only Intercept Trend and Intercept None LOGGDP Level (0.2440) (0.7656) * (0.0503) LOGINV Level (0.0441) (0.1139) * (0.0051) P-values are in parentheses Note: * Indicates variables are significane at 5% level of significance. As both variables are stationary at level so appropriate technique will be Ordinary Least Squares Method (OLS). But before applying OLS if we want to check the direction of the variables then we will have to use Granger Causality test that shows the direction of the variables. The results of Granger Causality tests are as: Table 2: Results of Granger Causality Test lags 2 Null Hypothesis Obs F-Statistic Prob. LOGINV does not Granger Cause LOGGDP LOGGDP does not Granger Cause LOGINV The results of the above table show bi-directional relation between GDP and investment. We fail to accept null hypothesis in both cases. So investment does Granger Cause GDP and GDP Granger Causes investment. The level of significance is taken as 5 percent. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 682

4 The results of OLS are given in the below table: Table 3: Results of Ordinary Least Squares Method. Dependent Variable: LOGGDP Method: Least Squares Sample: Included Observations: 41 Variable Coefficient Std. Error t-statistic Prob. C LOGINV R-squared Mean.dependent.var Adjusted R-squared S.D. dependent var S.E. of regression Akaike info criterion Sum squared resid Schwarz criterion Log likelihood F-statistic Durbin-Watson stat Prob(F-statistic) R-Squared is that means 96% variations in dependent variable are due to independent variable (investment) and other 4% are due to error term. The t-statistic for C is that show C is significant. The t-statistic for the variable LOGINV is So investment is significant and coefficient of log investment is that means 1% increase in investment will raise GDP by 0.89%. So there is a positive relation between investment and GDP of Pakistan. There is need to invest more. Conclusion Investment is the most important macroeconomics variable that can effect the economic growth. An attempt has been made to check the relationship between investment and GDP of Pakistan. Granger Causality results show bi-directional relation between investment and GDP of Pakistan. The results of OLS show positive relation between investment and GDP. One percent increase in investment will raise GDP by 0.89%. This shows the importance of investment in the country. Goverment of Pakistan should spend most of its budget on productive tasks that lead to economic growth. Goverment should also encourage investors at national and international level. keeping in view the spendings should be at productive tasks that generate revenue for the country and boost the economy. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 683

5 References Tobias (2002) says investment at entrepreneurial investment is extremely necessary. He finds returns to private equity are no higher than the returns to public equity. Haggblade, S. (2007). Returns to Investment in Agriculture. Policy Synthesis Food Security Research Project-Zambia, Patrinos, G. P. (2002). Returns to Investment in Education: A Further Update. World Bank Policy Research Working Paper 2881, September Najid Ahmad, M. L. (2012). A dynamic analysis of the relationship among inflation, investment, population growth,export and economic growth in Pakistan. Asian Journal Of Research In Business Economics And Management, Najid Ahmad, M. L. (2012). Returns To Education In Developing Countries: A Case Study Of Pakistan. Asian Journal Of Research In Business Economics And Management, Mehar, Y. (2008). Economic Evalution of Foreign Direct Investment in Pakistan. Pakistan Economic and Social Review, Falki, N. (2009). Impact of Foreign Direct Investment on Economic Growth in Pakistan. International Review of Business Research Papers, Najid Ahmad, M. L. (2012). Secondary Education and Economic Growth in Developing Countries: A Case Study of Pakistan. Interdisciplinary Journal of Contemporary Research in Business, Iqbal Mahmood, M. E. (2011). Macroeconomic variables and FDI in Pakistan. European Journal of Scientific Research, Abu NURUDEEN, O. W. (2010). On The Causal Links Between Foreign Direct Investment And Economic Growth In Nigeria, : An Application Of Granger Causlity And Co-Integration Techniques. Romanian Statistical Review. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 684