Impact of Foreign Direct Investment on Stock Market Capitalization in Pakistan: Sectoral Panel Evidence

Abstract

This paper explores the sectoral effect of foreign direct investment (FDI) on stock market capitalization in Pakistan with the use of balance panel data of 15 sectors that are listed in Pakistan Stock Exchange between 2002 and 2010. Using pooled OLS, fixed effects (FE) as well as random effects (RE) estimators, the paper undertakes the dynamic relationship between foreign capital inflows and the level of financial market development. The Hausmann specification test proves that the fixed effect model is better. The strong standard errors are used to counter heteroskedasticity. It has been empirically found that FDI positively statistically significant and economically significant influences area capitalization of the market. Findings are in favour of Cheap Asset Hypothesis and financial complementarity theory. The recent empirical data (2020-2025) also proves the two-way relationship between capital inflows and market deepening in new economies. Policy implications put stress on the institutional fortification, the diversification and the macroeconomic stabilization of FDI in sectors.