Foreign Direct Investment and Its Influence on Profitability in Pakistan’s Industrial Sector

Abstract

Foreign Direct Investment (FDI) is widely understood to be one of the determinants of economic growth and industrialization of the new economies. The industrial sector is an important keystone of Pakistan's national GDP, employment, and technological progress, hence making it a very attractive sector for investments by foreign investors. This study examines the effect of FDI on profitability level in the firms of the industrial sector in Pakistan. Drawing on the panel data from publicly-listed industrial firms in the period from 2015-2023, the paper studies the correlation between the inflows of FDI and firm-level profitability (measured by the return-on-assets (ROA) and the return-on-equity (ROE)). The analysis uses multiple regression models to determine the effects of FDI while controlling for firm size, leverage and market factors. The results show that there is a positive and significant relationship between FDI and the profitability so it can be inferred that foreign investment does not only contribute money but also improves technological capabilities, managerial expertise and market access for local companies. The study indicates policy implications to attract targeted FDI to maximize the profitability in targeted industrial subsectors.