Does foreign direct investment affect investment cash flow sensitivity? Evidence from Pakistan

Abstract

The purpose of this study is to analyze that whether foreign direct investment affects investment
cash flow sensitivity. Data for the study is collected from all the non-financial sectors listed on PSE
in 2017. This research is conducted on financial data of industries extracted from state bank of
Pakistan and financial statement analysis reports of seven industries containing to period of six
years (2012-2017). For the purpose of data estimation common effect model estimator is used.
Findings of the study revealed that investment opportunity, cash flows and foreign direct
investment have positive impact on rate of capital while the interaction term of FDI also has
positive and significant effect on rate of capital which means that due to FDI, cash flows of
Pakistan industry would be high, and their investment sensitivity will be less. According to
international trade theory, FDI not only brings finance in the economy but also brings technology,
manpower and technical skills. So, the current study suggested that investment cash flow sensitivity
arise due to limited amount of internal funds and due to agency problem FDI can mitigate these
issues. So, Pakistani government should make efficient policies for external investors and also
make good tax policies for external investors.