Assessing the Long-Run Influence of Human Capital and Macroeconomic Factors on Foreign Direct Investment: An Integrated Economics and HR Perspective

Abstract

Human capital as well as core macroeconomic fundamentals have been noted to be key determinants of foreign direct investment inflows, particularly in the emerging economies like Pakistan. However, in spite of this acknowledgement, these determinants are traditionally studied separately, which fails to capture the possible interaction effects in a unified analytical structure. To fill this gap, the current study considers FDI inflows to Pakistan to conduct a systematic investigation of long and short-term effects of human capital, political stability, inflation, unemployment, and taxation on FDI inflows to Pakistan with ARDL methodology covering the time range 1980 to 2024. Based on both endogenous growth theory and the eclectic paradigm, the following study would build a new interdisciplinary framework integrating the economics and human resource aspects and provide a more comprehensive interpretation of FDI processes. The variables chosen have an important equilibrium relationship at long-run level as measured in the empirical findings. It is interesting, that political stability and inflation is discovered to be favorable in FDI inflows, but unemployment, taxation, and human capital have negative long run effects. The error correction model (ECM) shows in the short-term that the equilibrium is quickly approached after the shock. The robustness and reliability of the estimated model can be confirmed by means of comprehensive diagnostic and stability tests. In explaining complementarity between human capital and macroeconomic fundamentals, this study offers a new, policy-relevant analytical framework to guide policy towards increasing sustainable foreign investment within Pakistani and other similar type of emergent economies.