Does Natural Resources Rent Affect Foreign Trade and Foreign Direct Investment Inflows to Pakistan

Abstract

This study investigated the impact of natural resource rent on foreign trade volume and foreign direct investment (FDI) inflows in Pakistan over the period of 1990–2024. Based on theoretical and empirical importance some controlled variables are also added to the model are gross domestic product (GDP), labour force participation rate, and the real effective exchange rate (REER) in relation to trade volume and FDI. The Autoregressive Distributed Lag (ARDL) bounds testing approach is employed to investigate the existence of long-run relationships, given the mixed order of integration established through stationarity tests. The bounds test confirms the presence of cointegration in both models. The long-run estimates reveal that natural resource rent exert a positive and statistically significant effect on both foreign trade performance and FDI inflows, highlighting the importance of resource price movements in shaping Pakistan’s external sector. GDP and labour force exhibit negative long-run effects on trade performance, while the REER has a positive and significant association. In the FDI model, GDP and the exchange rate positively influence FDI inflows, whereas the labour force has a negative but statistically insignificant effect. The short-run results indicate that contemporaneous changes in natural resource rent do not significantly affect either trade performance or FDI inflows. However, the statistically significant error correction terms confirm the presence of adjustment mechanisms through which short-run disequilibria converge towards long-run equilibrium. Overall, the findings underscore the strategic importance of natural resource rent in strengthening Pakistan’s external economic performance. The study recommends improving natural resource governance, promoting price stability, enhancing labour productivity, and adopting investment-friendly policies to attract sustainable FDI and strengthen trade competitiveness.