Int. J. Education Economics and Development, Vol. 8, No.

1, 2017 1

Foreign direct investment and higher education

development in Pakistan: evidence from structural
break testing

Wasim Qazi
Faculty of Education and Learning Sciences,
IQRA University,
Karachi-75300, Pakistan
Email: whqazi@gmail.com

Arshian Sharif and Syed Ali Raza

Faculty of Business Administration,
IQRA University,
Karachi-75300, Pakistan
Email: arshian.aslam@gmail.com
Email: syed_aliraza@hotmail.com

Corresponding author

Abstract: This study investigates the relationship between foreign direct

investment and higher education development in Pakistan by using the annual
time series data from the period of 1972 to 2013. Results of autoregressive
distributed lag-based coefficient model, fully modified ordinary least square
method and dynamic ordinary least square method indicate that foreign direct
investment has a positive and significant impact on higher education in long
run and short run. Results of causality analysis suggest the unidirectional causal
relationship of foreign direct investment and higher education development
in Pakistan which runs from foreign direct investment to higher education
development. It is concluded that foreign direct investment brings advanced
technologies, which requires more skilled and managerial labour force.
Similarly, the competition in labour market also increases with the entrance of
foreign direct investment. Consequently, people go for higher studies to enhance
their capabilities and to get the competitive edge in the labour market.

Keywords: educational policy; foreign direct investment; higher education

development; Pakistan; time series analysis.

Reference to this paper should be made as follows: Qazi, W., Sharif, A. and
Ali Raza, S. (2017) Foreign direct investment and higher education
development in Pakistan: evidence from structural break testing, Int. J.
Education Economics and Development, Vol. 8, No. 1, pp.121.

Biographical notes: Wasim Qazi is Associated with IQRA University as a

Professor and Vice Chancellor. He received PhD in Educational Management
from Hamdard University, Pakistan and Post-Doctorate from Education Eastern
Kentucky University, USA. He has published numerous papers in international
refereed ISI indexed journals. He is the Editor-in-Chief of Journal of
Management Sciences (JMS), a biannual online double-blind peer- reviewed
research journal in the area of management sciences. He is also heading the
Editorial Team of Journal of Education and Social Sciences (JESS) a biannual

c 2017 Inderscience Enterprises Ltd.

Copyright
2 W. Qazi et al.

online double-blind peer-reviewed research journal in the areas of education and

social sciences.

Arshian Sharif is a Lecturer and Manager Research and Publications of Faculty

of Business Administration in the Department of Management Sciences at Iqra
University. He holds an MBA/MS (Economics & Finance) from Iqra University.
Currently, he is doing PhD (Management Science) at Mohammad Ali Jinnah
University, Pakistan. He teaches quantitative technique in analysis and research
methods. He has published more than nine articles in selected peer-reviewed
journals. His interest in research lies in the areas of economics, banking,
e-commerce and education.

Syed Ali Raza is associated with IQRA University as an Assistant Professor

and Director Academics. His areas of interest include financial economics,
energy economics, tourism economics, corporate finance and behavioural
sciences. He has published numerous papers in international refereed journals
including Tourism Management, Energy Policy, Economic Modelling, Social
Indicators Research, Quality and Quantity, International Migration, Total
Quality Management and Business Excellence, Journal of Business Economics
and Management, Journal of Transnational Management, Transition Studies
Review, Global Business Review and Journal of Chinese Economic and Foreign
Trade Studies.

1 Introduction

In todays world, investment is one of the prime factor for the economic growth and
expansion of countrys global image. Foreign direct investment (FDI) is also a main
element of investment. Foreign direct investment is normally considered as a channel
to expand technology from developed to developing countries (Balasubramanyam et al.,
1996; Borensztein et al., 1998; Raza and Jawaid, 2014; Raza, 2015; Alam et al., 2015;
Jawaid and Raza, 2012). In recent years, countries have developed the extensive influence
of foreign direct investment in their markets. This dynamic characteristic of FDI is heavily
affected by multinational firms (MNFs). These firms bring knowledge spillovers, relevant
skills, necessary resources and combine them with the worldwide markets which can give
them large access to increase market potential, maximum returns and economies of scale
(which may allow them to increase market potential, maximise returns and economies of
scale) (Mody, 2004; Alexander and Warwick, 2007; Chaparro and Kulkarni, 2015; Karoui
and Feki, 2015). The prime purpose of these multinationals firms is to find opportunities
and grab those foreign market which are untapped and can give them provide them with
relative advantages. For a developing country, the effect of FDI is positive to enhance the
growth procedure and increase economic wealth (Tabassum et al., 2012; Prakash Pradhan,
2010; Ghazali, 2010).
The expansion or growth in human assets is considered to be the prime component for
the growth of any country. The secret of economic growth of any nation is primarily based
on their intellectual or human capital. According to Lucas (1993), the main differentiating
point between the nations is the difference in their human capital. The level and quality of
education is very crucial for socio-economic improvement of any society. In recent years,
intellectual by using higher education as an instrument to polish intellectual or human
capital (Qazi et al., 2014; Rena, 2009; Tessema and Abebe, 2011; Martiz and Fourie,
2015). With the help of higher education, economy can produce researchers, innovators,
scholars, critical thinkers and responsible citizens for the society. It also helps to enhance
 Foreign direct investment and higher education development in Pakistan 3

the opportunities to establish high living standards and social mobility. Therefore, less
developed or developing countries like Pakistan significantly need higher education, in
order to sustain and grow rapidly in future. In a developing country, higher education
impacts positively in augmenting the growth process and bringing the economic prosperity
(Bils and Klenow, 2000; Gylfason and Zoega, 2003; Chaudhary et al., 2009).
Foreign direct investment not only carries new knowledge, skills and technology to
the host country but also helps to enhance the human or intellectual capital by adding
the demand for labour force and consequently, generating a motivation to contribute into
higher education. Moreover, education is a main tool for economic expansion, human
development; therefore, each mechanism that may have an effect on it must be focused
cautiously. This leads to the question of the relationship among FDI and human capital
measured by number of enrolments in universities. A theory explains the relationship
between FDI and human capital as, the knowledge and skills embodied in humans that
are acquired through schooling, training and experience, and are useful in the production
of goods, services and further knowledge (Fuente and Domnech, 2006). Workers get
experience and enhance their productivity by on-job training as well as working. The
effect is not only limited to the lower operator and workers but encompasses all the
employees from lower to the top management (Blomstrm et al., 1994). However, the
results suggested that the relationship of FDI and higher education is found significant in
both directions (Lipsey and Sjholm, 2004; Mughal and Vechiu, 2009; Akin and Vlad,
2011).
According to Central Intelligence Agency1 , all over the world, Pakistan is ranked at
number 10 in the list of labour force by countries with 62.84 million labour forces. In
Pakistan, domestic and foreign investors can easily invest in any sector and there are
no limitations and restrictions on carrying in or bringing out capital. The government
of Pakistan also supports foreign investors in order to enhance the investment level in
Pakistan. In short, Pakistan is the gateway for foreign investor in order to expend the
external trade and foreign direct investment in the Central Asia. Pakistan has successfully
attracted 858.73 million US$ FDI in the year 2012 which shows a sound increase
(WDI, 2012). Nearly 70% of FDI has come into telecommunication sector, oil and gas,
banking and finance, domestic investment, trade liberalisation, low inflation, low external
debts, education, chemical, pharmaceutical, fertiliser and power sector which are strongly
encouraging FDI inflows in Pakistan. Currently, the key areas for FDI in Pakistan are IT,
mining, tourism, pharmaceuticals, textile, education, power and energy sector.
In Pakistan, till 2002, the universities were recognised by the University Grant
Commission (UGC). In 2002, the government introduced new ordinance with a name of the
Higher Education Commission Ordinance, and since then, Higher Education Commission
of Pakistan (HEC) is responsible for any policy of higher education, assurance of quality
in education, recognition of degrees, uplifting the standards of existing institutions and
developments of new institutions in Pakistan. In the last 10 years, HEC has been
performing a leading role towards building a knowledge-based economy in Pakistan by
producing more than 9,000 PhD scholars. The number of PhD scholars has continuously
increased from 1019 in 2011, 1105 in 2012 to 1176 in 2013. Furthermore, from the last
4 years, government has established a scholarship program at Federal level in which, 3237
scholars are educating in HEC recognised university. In the year of 20072008, under the
PhD scholarship program conducted by HEC, 2600 scholars were sent to overseas. Along
with this, 69 scholars have been send abroad under the Cultural Exchange Programme
during the period of 20072008. Moreover, HEC has sent 366 students for remedial studies
(equivalent to MBBS) during 20062007 with the collaboration of Cuban Government.
4 W. Qazi et al.

2 Foreign direct investment, higher education and economic growth in

Pakistan

The FDI trend in Pakistans economy is shown in Table 1. Table 1 shows that in 1970s,
the FDI was 23 million. FDI was steady and decreased in 1980s but extensively increased
in 1990s by more than 400% and the value was 126 million. In 2000s the change was
more than 300% and the FDI reached at 507.13 million. In the last three years, FDI
decreased slowly from the annual value of 1308.7 million in 2011 to 858.73 million in
2012. However, in 2013, the value of FDI increased and reached to 1037 million. The
fluctuating levels of FDI can be explained through various causes including the trends of
foreign direct investment and exports, which has improved continuously since 1970s.

Table 1 Trend of foreign direct investment, higher education and economic growth in Pakistan

FDI HE GDP
Time period (millions) (no. of enrolment) (millions)

1970s 23.00 27,112 24,364.930

1980s 22.60 54,134 43,106.119
1990s 126.57 78,755 71,129.974
2000s 507.13 486,339 108,065.545
2011 1,308.7 1,107,682 133,077.174
2012 858.73 1,319,799 137,744.249
2013 1,307.00 1,602,477 143,816.996

Source: Economic Survey of Pakistan

Higher education is continuously increasing in Pakistan since 1970s. In Pakistan, the trend
of higher education is shown in Table 1. In 1970s, the total number of enrolment was
27,112. The higher education was steady but constantly improved to 27,112, 54,134 and
78,755 in the years 1980s, 1990s and in 2000s, respectively. From 2011 to 2013, higher
education has increased rapidly with the annual number of enrolment increasing from
1,107,682, 1,319,799 to 1,602,477. Increasing level of higher education in Pakistan can be
explained through various causes, including the number of public and private universities,
which are continuously increasing since 1970s.
The economic growth trend in Pakistans economy is shown in Table 1. Table 1 shows
that in 1970s, the GDP was 24364.930. GDP was steady and improved in 1980s, 1990s
and 2000s, the value was 43106.119, 71129.974 and 71129.974. From 2011 to 2013, GDP
has increased with the annual value of 133077.174, 137744.429 and 143816.996 million
dollars. There are various causes that explain the increasing level of economic growth
in Pakistan that include the increasing trends of tourism, energy consumption and CO2
emissions (which continuously improved since 1970s).
The primary purpose of this study is to examine the relationship between foreign direct
investment and higher education in Pakistan. This can be regarded as an initiating effort to
investigate the impact of foreign direct investment on the performance of higher education
in Pakistan by taking annual time series data over the period of 19722013 and applying
more vigorous techniques for the robustness of the coefficients. This study establishes
a different and diverse contribution to the existing literature with reference to Pakistan
economy.
 Foreign direct investment and higher education development in Pakistan 5

The remaining paper is systematised as follows. Section 2 explains our empirical

studies and also explains the theoretical channel. Section 3 summarises the methodology
for identifying the effect of FDI on Higher education performance. In Section 4, we
discuss the results of OLS and more diverse techniques for the robustness of objectives
and conclude the paper with effective and efficient policy recommendations in Section 5.

3 Review of related literature

There are very limited studies done in the past to investigate the relationship between
foreign direct investment and higher education. These studies provided very contrasting
evidence on the correlation between foreign direct investment (FDI) and higher education
(HE). Also the effect of foreign direct investment on higher education, economic growth
is involved to ignore the inattentive variable bias.

3.1 Foreign direct investment and economic growth

Past studies showed that FDI has no effect on the long run growth of the economy if
it does not increase technology (Miankhel et al., 2009). Solow (1956) has proposed that
long run growth can only be enhanced by population growth and technology. Furthermore,
Blomstrm et al. (1994) explained that income per capita growth has a positive and
significant relationship with the FDI inflows to GDP ratio in developing countries. In
addition, Borensztein et al. (1998) conclude that FDI has a negative and significant impact
on the economic growth. They suggest that mix effect of human capital and FDI on growth
is positive. Moreover, Easterly et al. (1994) also debate that transfer of technology depends
on the distribution process and that can be completed by four modes: high technology
imports, quality of human capital, transfer of new technology and foreign technology
adoption. New growth theories suggest that technology transfer by FDI is essential in
developing countries because most of them lack infrastructure in terms of liberalised
markets, social and economic stability and educated population which are required for
innovating growth (Bengoa and Sanchez-Robles, 2003). It is also argued that FDI plays
a dual role by causing capital enhancement and by contributing total factor productivity
(Nath, 2005).
The role of FDI in economic advancement and growth remains undecided in the
literature. Many studies have shown significant and positive impact of FDI on economic
growth, whereas many studies have highlighted its negative effect as well. Since FDI and
economic growth are very important to Pakistans socio-economic advancement, there is a
requirement to investigate the relationship of foreign direct investment and growth.

3.2 Economic growth and higher education

Previous studies showed that education is one of the factors which explains economic
development of the nation. Lucas (1988) focused human capital advancement as a
prime factor of production and focused education as an explanation of human capital
accumulation. He analysed that development in educational level of the work force has
a significant and positive impact on the productivity graph which would enhance the
economic performance on an economy.
Mankiw et al. (1990) also argued in the favour of Solows model by finding out
the significant and positive impact of human capital (measured by education level) on
6 W. Qazi et al.

economic growth of the country. Barro (1989) also explained that human capital (measured
by education) has a significant and positive impact on economic growth of 98 countries
over the time era of 19601985. Gylfason and Zoega (2003) investigated the effect of
education on growth. They conclude that education is crucial for the growth of 87 countries
and also helps in reducing inequality. In contrast, Bils and Klenow (2000) analysed
the influence of schooling education and growth over the period of 19601990. Results
suggested that education doest not affect economic growth. Moreover, Pritchett (2001)
scrutinised that education is not very helpful in explaining the growth of cross-country
data.
On the other hand, few studies have been conducted on higher education and economic
growth. Chaudhary et al. (2009) investigated the impact of higher education and economic
growth of Pakistan over the period of 19722005. Results suggested that unidirectional
causality exists from economic growth to higher education. Huang et al. (2009) analysed
the impact of higher education and growth in China over the period of 19722007. Results
confirmed that bidirectional causality exists between higher education and economic
growth in China. Katircioglu (2010) examined the association between higher education
and economic growth in North Cyprus from the period of 1977 to 2007. Results suggested
that there is a positive significant relationship between economic growth and higher
education in North Cyprus. Qazi et al. (2014) investigated the impact of higher education
on economic growth in Pakistan. They concluded that there is a positive and significant
impact of higher education on economic growth of Pakistan in both short and long runs.
The role of higher education in economic advancement and growth varies from nation
to nation in the literature. Many studies have shown its significant and positive impact
on economic growth, whereas many studies have highlighted its weak effect. Since
higher education and economic growth are very important to Pakistans socio-economic
advancement, there is a requirement to investigate the relationship of higher education and
economic growth.

3.3 Foreign direct investment and higher education

There are a few studies done on foreign direct investment and education. Rasiah (2005)
explored the relationship between human development and FDI and suggested that FDI
helps to rise the human capital force to compensate the shortage. Dutta and Osei-Yeboah
(2010) identified the correlation between human capital (measured by literacy rate and
enrolment rates) and FDI of 76 developing countries from the period of 1980 to 2003. They
concluded that there is a positive relationship between human capital and FDI inflows.
Furthermore, Egger et al. (2005) explored the impact of higher education and economic
growth by using FDI inflows of 87 countries over the era of 19602000. The results
concluded that effect of FDI has a positive and significant influence on higher school
participation.
Like wise, Checchi et al. (2007) tested the interaction between FDI and eduction by
using panel data of 112 countries. They concluded that the presence of foreign firms has a
significant impact on tertiary enrolment in the host country. Moreover, Mughal and Vechiu
(2009) investigate the relationship between foreign direct investment and higher education
from developing countries. The study suggests that foreign direct investment has a week
but significant negative impact on higher education (secondary and tertiary education).
Additionally, Adefabi (2011) examined the relationship between FDI and human capital
and economic growth by using panel data of 25 Sub-Saharan African countries. Results
 Foreign direct investment and higher education development in Pakistan 7

suggested that FDI has a positive impact on economic growth, while human capital
accumulation has no impact because quality of education is more important than the
quantity. Narang and Jain (2014) discuss the current scenario of FDI in education sector
in India. They proposed the benefits of FDI and concluded that FDI can be used in order
to strengthen the education sector in India. In addition, Yildirim (2014) investigates the
relationship between foreign direct investment and education level by using panel data
from the period of 1999 to 2011. Results suggested that there is no significant relationship
exists between FDI stock level and education level (which is used as a proxy of human
capital investment).
Thus, the diversified propositions concerning the potential link of FDI and higher
education are ambiguous to draw any conclusion and vary across the countrys economic
condition. The present econometric analysis is, therefore, directed to investigate the impact
of FDI in the case of Pakistan to evaluate the contribution of foreign direct investment in
higher education performance of the country.

4 Empirical framework

In relation with the earlier studies, the model used to examine the impact of foreign direct
investment inflows on higher education development, is supported by using the following
framework:

HEt = o + 1 GDPt + 2 F DIt + 3 P OPt + t

where t is the error term, HE is the higher education performance which is measured by
the total number of student enrolment in universities during the year, FDI is the foreign
direct investment and it is measured as inward foreign direct investment in the country
during 1 year, GDP is gross domestic product which is measured as value of all finished
goods and service in the country throughout the year and POP is the total number of
population of the country during the year. The expected sign of GDP and POP are positive,
whereas the sign of FDI is to be determined. In our basic model, we also included POP and
GDP to control the effect of population and economic growth level in an economy. Present
study covers the annual time series data over the period of 19722013. Complete data are
collected from various issues of economic survey of Pakistan and State Bank of Pakistan.

4.1 Unit root test

Augmented Dickey Fuller and Phillip Perron unit root tests are elected to inspect the
stationary significance for long-term association of time series data. ADF2 is lied on the
following equation:

X
k
Yt = o + 1 Yt1 + dj Ytj + t
j=1

where t is pure white noise error term, is the first difference operator, k is the optimum
number of lag of criterion variable, o is a constant number in the equation and lastly, Yt
is a time series. Augmented Dickey Fuller test is used to explore whether the estimates
are same to zero or not. The variable is known as stationary, if the coefficient value 1 is
smaller than critical value from the statistics table. Philips-Perron unit root test is also used
8 W. Qazi et al.

to check the stationary property of the variable. This test is used to evaluate the coefficients
of based on t-statistics. Philips-Perron (PP) unit root test is established on the following
equation:
Yt = + Yt1 + t
The Phillips-Perron unit root test is also based on t-statistics which interacts with estimated
value of . There are some conflicting evidences available against ADF and PP tests.
Many researchers debate that both ADF and PP tests give misleading outcomes due to
their lower power and size. These tests are also failed to give any information regarding
structural break in the series. So, to cater the result of unit root test, we also deploy (Zivot
and Andrews, 1992) structural break unit root tests to investigate the structural break in the
series.

4.2 Cointegration analyses

The autoregressive distributed lag (ARDL) technique of cointegration designed by Pesaran
et al. (2001), Pesaran et al. (2000), Pesaran and Shin (1999), Pesaran and Pesaran (1997)
is designed by using unrestricted vector error correction model to analyse the long-term
interaction among foreign direct investment and higher education. The ARDL technique
has numerous advantages over other cointegration techniques. The ARDL method can be
applied regardless of whether basic variables are purely I(O), I(1) or equally cointegrated.
Pesaran and Shin (1999). The ARDL method has calculated improved sample properties
Haug (2002). In ARDL method, the estimates of the outcomes are even potential if the
predictor variables are endogenous (Pesaran et al., 2000, 2001). The ARDL model is
derived for estimation as follows:
Xp Xp X p
HEt = o + 1 HEt1 + 2 GDPt1 + 3 P OPt1
i=1 i=1 i=1
X
p
+ 4 F DIt1 + 1 HEt1 + 2 GDPt1
i=1
+ 3 P OPt1 4 F DIt1 + t
where o is constant and t is white noise error term, the error correction dynamics is
presented by summation sign, whereas the other part of the equation relates to long run
relationship. SBC (Schwarz Bayesian Criteria) is taken to evaluate the maximum lag of
model of any series. In ARDL approach, we first estimate the F-Statistics value by using
the proper ARDL models. Then, the Wald (F-statistics) test is used to explore the long-term
interaction between the series. The null hypothesis of no cointegration is rejected if the
calculated F-test statistics is more than the upper critical bond (UCB) value. The results
are questionable if the F-test value falls among UCB and LCB. Finally, the null hypothesis
of no long run relationship is accepted if the F-stats is below the LCB. If there exists a
long-term relationship between foreign direct investment and higher education then we
go for the calculation of long run coefficients. The model used to estimated the long run
coefficient is given below:
Xp Xp Xp
HEt = o + 1 HEt1 + 2 GDPt1 + 3 F DIt1
i=1 i=1 i=1
X
p
+ 4 P OPt1 + t
i=1
 Foreign direct investment and higher education development in Pakistan 9

If we find the evidence of long run relationship between foreign direct investment and
higher education, then we evaluate the short run coefficient by deploying the following
model:

X
p X
p
HEt = 0 + 1 HEt1 + 2 GDPt1
i=1 i=1
X
p X
p
+ 3 F DIt1 + 4 P OPt1 + nECTt1 + t
i=1 i=1

The error correction model shows the speed of modification needed to return the long run
equilibrium following a short run shock. The n is the coefficient of error correction term in
the model that specify the speed of modification.
Johansen and Juselius (1990) cointegration technique is used to investigate the
existence of prolong relationship among foreign direct investment and higher education
performance. This test is established on trace and max indicator. First, trace
cointegration rank r is as follows:

X
n
trace = T ln(1 j )
j=r+1

Second, max test maximum number of cointegration vector again r + 1 is denoted as

follows:

max (r, r + 1) = T ln(1 j )

The null hypothesis of J.J cointegration is that no long run relationship occurs among the
variables. If the trace and max value is greater than critical value (tabulated value), then
null hypothesis is rejected which directs a substantial prolong relationship exists among
the series of variables.
There are some contradicting evidences available besides the J.J and ARDL
cointegration approach in the literature. Researchers discuss that these approaches failed
to give any information regarding structural breaks in the series and could provide a
dubious results of long-term interaction between the variables. Hence, to cater the results
of long run relationship between foreign direct investment and higher education, we also
use Gregory and Hansen (1996) structural break cointegration approach to investigate the
structural breaks in the series.

4.3 Long run stability and elasticity

In the present study, we used three diverse estimation approaches to investigate the long run
coefficient and stability of model to cater the robustness of long-term interaction between
foreign direct investment and higher education in Pakistan. First by using ARDL-based
coefficients approach; furthermore, by using fully modified ordinary least square (FMOLS)
method and finally by using dynamic ordinary least square (DOLS) method.
10 W. Qazi et al.

4.4 Causal relationship

In the present study, we utilised more rigorous econometric approach variance

decomposition method to investigate the causal relationship between focused variables.
The VDM method has various advantages over other methods of causal interaction of time
series analysis. The VDM method gives the magnitude of the explained error variance for
a series accounted for innovations from every predictor variable over diverse time period
(Wong, 2010; Raza et al., 2015).
This confirms that our findings and conclusions regarding causal relationship of foreign
direct investment and higher education are reliable and more accurate as compared to the
past studies.

5 Data analysis and results

First of all, we confirm the stationary properties, for this we use augmented Dicky-Fuller
(ADF) and Phillips-Perron (PP) unit root test. The results of ADF and PP test are shown in
the Table 2. Initially, both tests are applied on level then on first difference of variables.

Table 2 Stationary test results

Augmented Dickey-Fuller Phillips-Perron

Variables I(0) I(1) I(0) I(1)

C C&T C C&T C C&T C C&T

HED 1.373 0.539 5.500 5.768 1.373 0.604 5.489 5.768

GDP 1.300 1.426 4.921 4.896 1.174 1.703 4.919 4.897
FDI 1.570 2.090 4.130 4.070 1.480 2.230 4.420 4.400
POP 0.900 1.990 5.660 6.990 2.010 2.120 3.450 4.240

Notes: The critical values for ADF and PP tests with constant (c) and with constant
& trend (C&T) 1, 5 and 10% levels of significance are 3.711, 2.981,
2.629 and 4.394, 3.612, 3.243, respectively
Source: Authors estimation

Table 2 shows the results that every variable is integrated and stationary at first difference.
This confirms that the series of variables can be used for more long run estimations.
There are some researches in the past which argue that ADF and PP tests give misleading
outcomes due to their less power and size. These outcomes are also failed to give any
information regarding the structural breaks in the series. In order to cater this issue, we also
use (Zivot and Andrews, 1992) structural break unit root test to investigate the structural
breaks in the series. The results of Table 3 show the structural break unit root test.
Table 3 shows the results of every variable and all variables are showing trend (non-
stationary) at level with trend and intercept, then all variables are not showing trend
(stationary) at first difference. This ratifies that all variables are cointegrated at I(1). All
the three tests of unit root confirm the robustness of outcomes that all considered variables
are cointegrated at I(1) and these variables can be further used for long run estimation
procedure.
 Foreign direct investment and higher education development in Pakistan 11

Table 3 Zivot-Andrews structural break trended unit root test

At level At 1st difference

Variable T-Statistics Time break T-Statistics Time break

HE 2.058 (1) 2002 8.954 (1)* 2002

GDP 2.285 1993 6.372* 2004
FDI 2.058 2004 3.984** 1998
POP 1.678 2004 5.849* 1994

* Represents significance at 1% level

** Represents significance at 5% level
Notes: All variables are run on lag 1
Source: Authors estimation

In order to find the long run relationship between FDI and HE, we use autoregressive
distributed lag (ARDL) method of cointegration. Initially, we determined the maximum lag
length of the variables by using Schwarz Bayesian criterion. The results of Table 4 explain
the outcomes of ARDL cointegration method.

Table 4 Lag length selection and bound testing for cointegration

Lags order AIC HQ SBC F-test statistics

0 2.758 2.696 2.589

1 13.809* 13.504* 12.965* 34.854*
2 12.147 12.098 11.227

*1% level of significant

Source: Authors estimation

The result of ARDL proposed that we reject the null hypothesis of no cointegration
in model since the value of the F-statistics is higher than the UBC value at 1% level
of significance. Due to this, we accept the alternate hypothesis which concludes that
an effective long run relationship exists between foreign direct investment and higher
education performance in Pakistan.
In order to confirm the long run relationship, we also use (Johansen and Juselius, 1990).
The results of Table 5 explain the trace statistics with its critical value and maximum
eigenvalue with its critical value of Johansen and Juselius (1990) cointegration technique.
The consequences show the rejection of null hypothesis which indicates that there is no
cointegration in the model at 5% level of significance. Therefore, we accept the alternated
hypothesis which indicates the existence of one or more cointegrating vectors. The results
confirm the presence of long run relationship between foreign direct investment and higher
education performance in Pakistan.
Some researches argue in this past that J.J and ARDL cointegration techniques give
dubious and misleading outcomes in order to show the existence of structural break in a
series. So, to determine the outcomes of long run relationship, we also use (Gregory and
Hansen, 1996) structural break cointegration method. The results of Table 6 explain the
12 W. Qazi et al.

Gregory and Hansen cointegration technique. The outcomes endorse the effective long
run relationship exists between variables. All the three cointegration tests validate the
robustness of outcomes that confirm the long run relationship exists between the variables.
After the confirmation of valid long run relationship between foreign direct investment and
higher education performance, now we deploy the ARDL approach to evaluate the long
and short run coefficients.

Table 5 J.J cointegration test

Null hypothesis Trace 5% critical Max. Eigen 5% critical

No. of CS(s) statistics values value statistics values

None * 71.227 60.061 37.171 30.440

At most 1 32.056 40.175 17.853 24.159
At most 2 14.804 24.276 8.246 17.797

Source: Authors estimation

Table 6 Gregory-Hansen structural break cointegration test

ADF procedure

Structural break 2002

T-Statistics 7.879
P-value 0.000

Phillips procedure

Structural break 2002

T-Statistics 6.567
P-value 0.000
Source: Authors estimation

In order to estimate the lag length order of all variables, we use unrestricted vector
autoregression method. The selection of criterion is based on the minimum value of
Schwarz Bayesian criterion. The results of lag order are presented in Table 7. The results
show that each variable should be used on lag one. Now, we estimate the long run and short
run coefficients by using these lag length selections.
The results of Table 8 shows the estimation of long run ARDL. the outcomes
suggest that economic growth, foreign direct investment and population growth are the
significant determinants of higher education performance in Pakistan. The results show
that population growth has a positive and significant impact on higher education in
Pakistan, which confirms that high growth in population enhance the higher education
performance in Pakistan. The results further indicate that there is a positive and significant
effect of economic growth on higher education performance in Pakistan. The results of
foreign direct investment proposed a positive influence of foreign direct investment on
higher education performance in Pakistan. Finally, it can be discussed that foreign direct
investment plays a significant role to increase higher education performance in Pakistan.
 Foreign direct investment and higher education development in Pakistan 13

The findings of the present study are consistent and constant with the past available
literature which is showing the positive relationship between foreign direct investment and
higher education performance (Egger et al., 2005; Rasiah, 2005; Checchi et al., 2007; Dutta
and Osei-Yeboah, 2010).

Table 7 Lags Defined through VAR of variables

0 1 2 Selected
Lag SBC SBC SBC Lags SBC

HED 3.395 0.727* 0.402 1

GDP 0.264 5.157* 4.836 1
FDI 0.209 4.748* 4.521 1
POP 2.585 5.245* 4.270 1

Source: Authors estimation

*Indicate minimum SBC values

Table 8 Long run results using ARDL approach

Variables Coeff. T-Stats Prob.

C 0.097 0.752 0.460

HE (-1) 0.569 5.355 0.000
GDP 0.584 4.073 0.000
GDP (-1) 0.223 1.430 0.163
FDI 0.283 2.783 0.009
FDI (-1) 0.222 0.759 0.454
POP 0.237 3.060 0.005
POP (-1) 0.131 1.615 0.117

Adj. R2 0.971
D.W stats 2.161
F-stats (Prob.) 6347.086 (0.000)

Source: Authors estimation

The results of Table 9 explains the short run relationship between foreign direct investment
and higher education performance in Pakistan. The outcomes show that the lagged
error correction term for the estimated higher education performance equation is both
statistically significant and negative in the model. This revealed that an effective short run
relationship exists among foreign direct investment and higher education performance in
Pakistan. The measure of error term, displaying a value around 0.651, recommended
that about 65.1% of disequilibrium is corrected in the present year. The results also show
the significant and positive effect of population, foreign direct investment and economic
growth in short run as well.
14 W. Qazi et al.

Table 9 Short run results using ARDL approach

Variables Coeff. T-Stats Prob.

C 0.081 0.549 0.589

HE (-1) 0.014 2.272 0.034
GDP 0.863 3.105 0.006
GDP (-1) 0.148 0.840 0.411
FDI 0.238 2.629 0.016
FDI (-1) 0.001 0.521 0.608
POP 0.174 5.973 0.000
POP (-1) 0.553 0.890 0.381
ECM(-1) 0.651 2.695 0.014

Adj. R2 0.889
D.W stats 2.091
F-stats (Prob.) 6027.086 (0.000)

Source: Authors estimation

5.1 Sensitivity analysis of long run coefficients

In this section, we check the robustness of the preliminary results of long run coefficients
by two different sensitivity analyses, namely fully modified ordinary least square (FMOLS)
and dynamic ordinary least square (DOLS).

5.2 Dynamic ordinary least square

The dynamic ordinary least square (DOLS) is developed by Stock and Watson (1993).
DOLS is used to confirm the robustness of the long run coefficient results. This technique
includes calculating the criterion variable on predictor variable in level, lead and lags. By
this technique, the issue of endogeneity, less sample bias and serial correlation issue by
adding lags and leads to predictor variable (Stock and Watson, 1993; Sharif and Raza,
2016). The results of dynamic ordinary least square model of foreign direct investment
and higher education performance is shown in Table 10. The results confirm that the
coefficients of foreign direct investment and higher education performance remain same
with the sign and with the significance after using the lead in the model. Finally, it
can be explained that the interaction of foreign direct investment and higher education
performance will also remain same in the future up to lead 1.

5.3 Fully modified ordinary least square

The fully modified ordinary least square technique (FMOLS) is developed by Phillips and
Hansen (1990). This technique is used to investigate the robustness of the primary results
of long run coefficients. FMOLS can control the issue of endogeneity, less sample bias
and serial correlation (Phillips and Hansen, 1990). The results of FMOLS is shown in
Table 10. The results confirmed that the coefficients of all variables, namely population
growth, economic growth and foreign direct investment retain the significance and same
sign after deploying advance econometric techniques. Finally, it can be recommended that
the interaction between the foreign direct investment and education in the Pakistan has
 Foreign direct investment and higher education development in Pakistan 15

the same sign and significance with its magnitude being similar as that of ARDL-based
coefficient model. These findings explain that the initial results are robust.

Table 10 Robustness of long run coefficients

Variables FMOLS DOLS

Coeff. T-Stats Prob. Coeff. T-Stats Prob.

C 4.126 4.133 0.000 1.378 0.867 0.395

GDP 0.639 9.384 0.000 0.794 5.890 0.000
FDI 0.252 5.824 0.000 0.229 2.922 0.008
POP 0.181 4.271 0.000 0.141 5.638 0.000

Adj. R2 0.982 0.961

D.W stats 1.861 2.16

Source: Authors estimation

5.4 Stability of short run model

The stability of short run model in the sample period is assessed by taking the cumulative
sum (CUSUM) and CUSUM of square test on the recursive residuals. CUSUM test
identifies systematic variations from the coefficients of regression, while CUSUM of
square test is able to detect the unexpected changes from steadiness of regression
coefficients (Brown et al., 1975).
Figures 1 and 2 denote the outcomes of CUSUM and CUSUM of square tests,
respectively. Results specify that the statistics of both CUSUM and CUSUM of square test
lie within the interval bands at 5% confidence interval. Results propose that there is no
structural instability in the residuals of equation of economic growth.

Figure 1 Plot of cumulative sum of recursive residuals. The straight lines represent critical
bounds at 5% significance level (see online version for colours)
16 W. Qazi et al.

Figure 2 Plot of CUSUM of square of recursive residuals. The straight lines represent critical
bounds at 5% significance level (see online version for colours)

5.5 Causality analysis: variance decomposition analysis

Variance decomposition method is used under vector autoregressive (VAR) system, which
identifies the strength of the causal relationship between foreign direct investment and
higher education performance. The variance decomposition method gives the magnitude
of the forecasted error variance for a series by innovations from every independent variable
over the different time periods. Wong (2010) and Raza et al. (2015) have used this method
to find the causal association between selected variables. Table 11 represents the results of
variance decomposition analysis.
The results of Table 11 show the causal relationship of foreign direct investment
with higher education performance. The results of higher education model suggest that
in initial round, the change in higher education emission is explained 100% entirely by
its own improvements. In the second period, 94.7023% describes by own improvement,
2.373% by foreign direct investment, 2.793% by economic growth and 0.131% by
population. In the fifth period, the shocks in higher education describe 73.340% by its
own improvement, 12.650% by foreign direct investment, 8.472% by economic growth
and 5.538% by population. In the tenth period, the shocks of higher education describe
22.006% improvement by its own, 28.629% by foreign direct investment, 30.764% by
economic growth and 18.600% by population, respectively, whereas in reverse the causal
relationship at tenth level, the shocks of foreign direct investment describe 52.492% by
its own, 23.335% by economic growth, 16.808% by population and 7.365% by higher
education performance. These findings propose the unidirectional causal relationship of
foreign direct investment and higher education performance in Pakistan which runs from
foreign direct investment to higher education performance.
 Foreign direct investment and higher education development in Pakistan 17

Table 11 Results of variance decomposition approach

Period HE GDP FDI POP

Variance decomposition of HE
1 100.000 0.000 0.000 0.000
2 94.703 2.793 2.373 0.131
3 89.754 3.610 4.296 2.340
4 82.246 5.018 8.240 4.496
5 73.340 8.472 12.650 5.538
6 61.941 13.129 15.429 9.501
7 47.955 18.815 21.782 11.448
8 34.541 23.296 26.729 15.434
9 27.488 27.817 28.210 16.485
10 22.006 30.764 28.629 18.600
Variance decomposition of FDI
1 5.029 10.871 80.949 3.151
2 7.039 13.222 77.724 2.015
3 8.591 16.596 72.868 1.945
4 9.547 20.197 67.178 3.078
5 10.099 22.809 61.91 5.182
6 10.462 24.119 57.584 7.835
7 9.736 24.445 55.125 10.694
8 8.971 24.211 53.463 13.355
9 8.184 23.765 52.599 15.452
10 7.365 23.335 52.492 16.808

Source: Authors estimation

6 Conclusion and policy recommendation

This study investigates the relationship between foreign direct investment and higher
education development in Pakistan by using the annual time series data from the period
of 1972 to 2013. We use foreign direct investment and number enrolment in higher
education development to analyse the long run relationship between foreign direct
investment and higher education development in Pakistan. The ARDL bound testing
cointegration approach, Johansen and Juselius cointegration approach and Gregory and
Hansen structural break cointegration approach confirm the valid long run relationship
between foreign direct investment and higher education development. Results of ARDL-
based coefficient model, fully modified ordinary least square method and dynamic ordinary
least square method indicate that foreign direct investment has a positive and significant
impact on higher education in long run. The same positive and significant relationship is
also found in the short run in the model. Results of causality analysis by using the variance
decomposition approach suggest the unidirectional causal relationship of foreign direct
investment and higher education development in Pakistan which runs from foreign direct
investment to higher education development.
The positive influence of foreign direct investment on higher education (directives)
suggests the significance of foreign direct investment in the human capital development of
the host country. FDI contributes the host country in the form of technological externalities,
18 W. Qazi et al.

the formation of human capital or have access to foreign markets which lead to long-term
economic growth. FDI not only resulted a reduction in unemployment by creating more
employment opportunities, but it is also nurturing human capital and institutions in the
host countries. This inward FDI may enhance technological know-how and training of the
local workforce, which leads to enhance the efficiency of the domestic labour force. All
of these indicators will lead to create more employment opportunities and also maintain
the wage level in the economy, which subsequently will lead to increased higher education
performance in Pakistan. Foreign direct investment brings advanced technologies, which
requires more skilled and managerial labour force. Similarly, the competition in labour
market also increases with the entrance of foreign direct investment. Consequently, the
people go for higher studies to enhance their capabilities and to get the competitive edge
in the labour market.
Hence, it is confirmed that foreign direct investment is good for the betterment of
higher education performance in Pakistan. Therefore, it is recommended that policymakers
should formulate such attractive policies which enhance the confidence of foreign investors
and leads to attract the foreign direct investment in Pakistan. Furthermore, Pakistan is
a labour-intensive country, therefore, policymakers should invest more on human capital
to absorb new technologies to get more benefit of technological transfer as a result of
this inward FDI. Pakistan should encourage efficiency seeking FDI rather than market
seeking FDI. Policymakers ought to take care of those firms who have potential to be an
exporter against those multinationals who capture the potential of those firms. Pakistan
would get more benefit from inward FDI when they utilise this investment in accordance
with their comparative advantage. In addition, there are some other policies to make better
inflows of FDI. More stable monetary and fiscal policy would be beneficial to attract FDI.
Simultaneously, FDI does not work uniformly in all sectors; therefore, policymakers should
understand the difference and identify sectorwise policies relating with FDI. The law and
order should also be maintained, which is the essential part to attract the foreign investors.

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Notes

1 https://www.cia.gov/library/publications/the-world-factbook/rankorder/2095rank.html.

2 See, Dickey and Fuller (1979), Raza et al. (2016).