Impact of Customer Satisfaction and Brand Image on Brand Loyalty:

Evaluation for the Mobile Industry of Pakistan

&
Impact of Foreign Direct Investment and Unemployment on Economic Growth
Case Study of Pakistan
Submitted By:
KAMRANUDDIN (8534)
KAMRANPASHA80@GMAIL.COM
SYED TALAL HASAN (7454)
STALALH@HOTMAIL.COM
OWAIS MAJID (7621)
OWAIS1122@GMAIL.COM
SAQIB AWAN (7935)
SAQIBAWAN30@GMAIL.COM

MBA Program
Submitted to:
Mr. Tehseen Jawaid
Spring (2015)

PRIMARY REPORT

IMPACT OF BRAND IMAGE AND CUSTOMER SATISFACTION

OF BRAND LOYALTY

ACKNOWLEDGEMENT

In the Name of Allah, the most Beneficent, the most Merciful

We take this opportunity to express our profound gratitude and deep regards to our guide Mr.
Tehseen Jawaid for his exemplary guidance, monitoring and constant encouragement
throughout the course of this project. The blessing, help and guidance given by him time to
time have given us the strength to look beyond our limits and get the best out of us.

Abstract
This study focuses on the effect of customer satisfaction & brand image on brand loyalty. Many
researches indicate significant positive effect of customer satisfaction & brand image on brand loyalty.
To test the robustness of initial results, empirical research is been conducted with the sample of 73
original customers.The respondents and their responses have been further tested by applying different
statistical techniques of SPSS software. Results concluded from the study are that brand loyalty is
significantly dependant on customer satisfaction and brand image.
Both have a positive significant impact on brand loyalty but the impact of brand image on customer
through proper positioning is slightly greater than customer satisfaction. The results

indicate that

when the companies provide high quality of service and quality product to the customers, the customer
will become more satisfied and become loyal with the brand.

Key Words: Brand Image, Customer Satisfaction and Brand Loyalty

1. Introduction
As the market is changing rapidly and competition is increasing furiously it is very important for
marketers to understand that what effects Customer retention / brand loyalty. This is the time that
marketers should put themselves in the shoes of customers and try to understand the importance of
brand loyalty from their perspective. It will not only give them the understanding of how consumer
perceive and buy brands but also help them in making better future marketing strategies.. Many studies
have been done to spell out the effects of customer satisfaction & brand image on brand loyalty& most
of them found significant relationship among variables.
Ghafoor, iqbal & Murtaza (2011) identifies that brand image has greater effect on brand loyalty while
Sondoh Jr, Omar, Wahid, Ismail and Harun (2007) explain customer satisfaction as an strong influential
factor of brand loyalty. Customer satisfaction is the key variable for any business. Price, quality,
response time & product variety etc they all sum up into customer satisfaction.
Brand image is a perception in customers mind about the real & imaginary qualities & shortcomings.
Its built over a period of time through massive brandings & delivering beyond customer expectations.
To gauge brand image different attributes were asked to the respondents.
If a customer is satisfied with the product, it will automatically lead to a better brand image & positive
outcomes of both results in brand loyalty/ customer retention. Customer will prefer to buy again &
again product of that brand.
On the basis of previous studies hypothesis has been developed that there is a positive significant
relationship among variables.

The rest of the paper is organized as follows. Literature reviews the theoretical and empirical
background on the effects of customer satisfaction and brand image on brand loyalty. Concluding
Remarks and Implications provides some policy implications and set directions for further research.
2. Literature Review
2.1 Theoretical Background
According to Hsieh, Pan, and Setiono (2004), "a successful brand image enables consumers to identify
the needs that the brand satisfies and to differentiate the brand from its competitors, and consequently
increases the likelihood that consumers will purchase the brand" (p. 252). A company or its product/
services which constantly holds a favorable image by the public, would definitely gain a better position
in the market, sustainable competitive advantage, and increase market share or performance (Park,
Jaworski, & MacInnis, 1986). In addition, several empirical findings have confirmed that a favorable
image (i.e. brand, store/retail) will lead to loyalty (e.g. Koo, 2003; Kandampully & Suhartanto, 2000;
Nguyen & LeBlanc, 1998), brand equity (Faircloth, Capella, & Alford, 2001; Biel, 1992; Aaker, 1991;
Keller, 1993), purchase behavior (Hsieh et al., 2004) and brand performance (Roth, 1995).
Reynolds (1965) noted that "an image is the mental construct developed by the consumer on the
basis of a few selected impressions among the flood of the total impressions; it comes into being
through a creative process in which these selected impressions are elaborated, embellished, and
ordered" (p. 69). Kotler (2001) defined image as "the set of beliefs, ideas, and impression that a person
holds regarding an object" (p. 273). On the other hand, Keller (1993) considered brand image as "a set
of perceptions about a brand as reflected by brand associations in consumer's memory" (p. 3). A similar
definition to Keller's was proposed by Aaker (1991), whereby brand image is referred to as "a set of
associations, usually organized in some meaningful way" (p. 109). Biel (1992) however defined brand
image as "a cluster of attributes and associations that consumers connect to the brand name" (p. 8).

Brand image has been conceptualized and operationalized in several ways (Reynolds &
Gutman, 1984; Faircloth et al., 2001). It has been measured based on attributes (i.e. Koo, 2003;
Kandampully & Suhartanto, 2000); brand benefits/ values (i.e. Hsieh et al., 2004; Roth, 1995; Bhat&
Reddy, 1998); or using Malhotra's (1981) brand image scale (i.e. Faircloth et al., 2001). Measuring
image based on the above definition would help marketers to identify the strengths and weaknesses of
their brand as well as consumers' perceptions toward their product or services.
For brand attitude, Keller (1993) referred to Wilkie's (1986) definition of brand attitudes which
was "consumers' overall evaluations of a brand" (p. 4)
Overall, image can generate value in terms of helping customer to process information,
differentiating the brand, generating reasons to buy, give positive feelings, and providing a basis for
extensions (Aaker, 1991). Creating and maintaining image of the brand is an important part of a firm's
marketing program (Roth, 1995) and branding strategy (Keller, 1993; Aaker, 1991). Therefore, it is
very important to understand the development of image formation and its consequences such as
satisfaction and loyalty
Oliver (1997) defined satisfaction as "the consumer's fulfillment response. It is a judgment that
a product or service feature, or the product or service itself, provided (or is providing) a pleasurable
level of consumption-related fulfillment, including levels of under- or over-fulfillment" (p. 13).
Szymanski and Henard (2001) noted that previous research on consumer's satisfaction focused
primarily on the effects of expectations, disconfirmation of expectations, performance, affect, and
equity on satisfaction. The importance of expectations has been acknowledged in previous studies on
customer's satisfaction (e.g. Churchill &Surprenant, 1982; Oliver, 1980; Tse& Wilton, 1988).
Customer's expectations are pre-trial beliefs about a product (Olson & Dover, 1979) that function as
comparison standards or reference points against which product performance is judged (Oliver, 1980;

Bearden & Teel, 1983). The expectancy disconfirmation paradigm suggests that consumers are satisfied
when the product perform better than expected (positive disconfirmation), dissatisfied when consumers'
expectations exceeded actual product performance (negative disconfirmation), and neutral satisfaction
when the product performance matches expectations (zero disconfirmation/confirmation) (Oliver,
1980; Churchill & Surprenant, 1982; Oliver & Sarbo, 1988; Bearden & Teel, 1983).
Several researchers have explored different types of alternative comparison standards beside
expectations such as experience-based norms (Woodruff, Cadotte, & Jenkins, 1983; Cadotte, Woodruff,
& Jenkins, 1987); equity theory (Oliver & Swan, 1989; Tse& Wilton, 1988); desires (Spreng and
Olshavsky, 1993), and ideal performance (Tse& Wilton, 1988). All of these aforementioned comparison
standards have been tested empirically in customer's satisfaction/ dissatisfaction research.
For this study, the satisfaction response will be reflected towards the level of affection for the
brand which is in line with the suggestions by Jacoby and Chestnut (1978) and Oliver (1997, 1999).
Oliver (1999) noted that consumers at the affective stage would develop a positive attitude towards the
brand or liking the brand as a result of satisfactory repetitive usage over time.
Loyalty Intention Jacoby and Chestnut (1978) have identified more than 50 operational
definitions of brand loyalty, which can be classified as behavioral, attitudinal and the composite
approach in the literature. Generally, more than 60% (33) of the 53 loyalty measures are behavioral
terms found in Jacoby and Chestnut's (1978) work. Behavioral loyalty has been considered as repeat
purchase frequency (e.g. Brown, 1952) or proportion of purchase (e.g. Cunningham, 1956), whereas
attitudinal brand loyalty included "stated preferences, commitment or purchase intentions of the
customers" (Mellens, Dekimpe, & Steenkamp, 1996: p. 513). However, most of these behavioral
definitions above are criticized by Oliver (1999), Jacoby and Chestnut (1978) and Day (1969) as
problematic. Oliver (1999) for instance argued that "all of these definitions suffer from the problem that
they recorded what customer did, and none tapped into the psychological meaning of loyalty" (p. 34).

The composite definition of loyalty emphasized two different approaches of loyalty: the behavioral and
attitudinal concept, which was initially proposed by Jacoby and Chestnut (1978) and later by Oliver
(1997)
Jacoby and Chestnut (1978) provided a conceptual definition of brand loyalty as: (i) biased (i.e.
non-random), (ii) behavioral response (i.e. purchase), (iii) expressed over time, (iv) by some decisionmaking unit, (v) with respect to one or more brands out of a set of such brands, and is a function of
psychological (decision-making evaluate) processes.
Brand loyalty can be functionalized either based on behavioral, attitudinal or composite
approach (Jacoby & Chestnut, 1978). Behavioral loyalty has been considered as repeat purchases
frequency (e.g. Brown, 1952) or proportion of purchase (e.g. Cunningham, 1956), while attitudinal
brand loyalty referred to "stated preferences, commitment or purchase intentions of the customers"
(Mellens et al., 1996: p. 513). In addition, few academicians suggested that using the composite
approach (attitudinal and behavioral approach) will provide a more powerful definition of brand loyalty
(Day, 1969; Jacoby & Chestnut, 1978; Dick & Basu, 1994).
All of the above aforementioned approaches however have been argued by several scholars and
have several limitations. Jacoby and Chestnut (1978) argued that the behavioral measures simply
represent the static outcome of a dynamic decision process (i.e. solely on actual behavior). Therefore,
this approach makes no attempt to understand the factor underlying brand loyalty purchasing and
insufficient to clarify the causative factors that determine how and why brand loyalty developed or
modified (Jacoby & Chestnut, 1978). The attitudinal measures are concerned with consumer feelings
toward the brand and stated intention such as likelihood to recommend and likelihood to repurchase the
product (Schiffman & Kanuk, 2004; Jacoby & Chestnut, 1978). Intention to repurchase can be
measured by asking consumers about their future intentions to repurchase a given product or service
(Jones & Sasser, 1995). Furthermore, Jones and Sasser (1995: p. 94) suggested that (i) companies can

capture this information (i.e. intent to repurchase) when they measure satisfaction, making it relatively
easy to link intentions and satisfaction for analytical purposes, (ii) intent to repurchase can be measured
at any time in the customer relationship make its especially valuable in industries with a long
repurchase cycle, and (iii) intent to repurchase is a strong indicator of future behavior.
It is important to note that the entire brand loyalty phenomenon cannot be assessed if the
attitudinal loyalty is not extended over the action behavior (Amine, 1988). In relation to loyalty, the
linkages between attitude and behavior approach was found to be weak (East, Gendall, Harmond, &
Wendy, 2005). For instance, Hennig-Thurau and Khee (1997) indicated that those studies that used
actual behavior outcomes showed weak associations or negative relationships with satisfaction. Noting
this, the authors will adopt the attitudinal approach as suggested by Rundle -Thiele and Bennett (2001)
in conceptualizing the subject matter. Rundle-Thiele and Bennett (2001) argue that attitudinal loyalty
measures should be appropriate to predict future brand loyalty under these circumstances: (i) where the
market is not stable, (ii) where there is a propensity towards sole brands, and (iii) where there is a high
involvement and high perceived risk.
To sum up, the issues of loyalty mainly concerned on how loyalty is operationalized. It is very
important to understand how we should measure loyalty. Although there are three approaches that can
be used to measure loyalty (i.e. behavioral, attitudinal, and composite approaches), most researchers
resorted to attitudinal measurement in terms of intention to repurchase and intention to recommend as
an indicator of loyalty (e.g. Lau & Lee, 1999; Kandampully & Suhartanto, 2000; Sivadas& BakerPrewitt, 2000; Chiou et al., 2002).
2.2 Empirical Studies
This section consists of some reviews on previously done studies.

Ghafoor, Iqbal and Murtaza (2011) analyze the impact of customer satisfaction and brand image
on brand loyalty by taking the sample of 200 respondents over a period of a month. Customer
Satisfaction, Brand image and Brand loyalty are the variables. Different Statistical techniques are
applied. Result shows that the customer satisfaction and brand image both have a significant positive
impact on the brand loyalty. Brand Image has greater impact on brand loyalty than the customer
satisfaction. It is suggested that the customers can be made loyal to the brand by providing satisfaction
through better quality services and communicating and developing a good brand image through
accurate positioning.
Sondoh Jr, Omar, Wahid, Ismail and Harun (2007) analyze the effect of brand image on overall
satisfaction and loyalty intention by carried out sample of 97 females. 5 brand images are taken as
variables along with satisfaction (Independent variable) and Loyalty (Independent variables). Data
were arranged with respect to their age, occupation, education, ethnic and income. Regression
Techniques have been used. Result shows that overall satisfaction does influence customers' loyalty. It
is suggested that marketers should focus on brand image benefits in their effort to achieve customer
loyalty.
Ahmed, Rizwan, Ahmad and Haq (2014) investigate the effect of service quality, perceived
quality, perceived value, brand trust and customer satisfaction on brand loyalty by collecting data from
the randomly selected 150 Hewlett Packard (HP) product consumers. Brand loyalty, brand trust,
customer satisfaction is used as a variables. Descriptive nature of data is analyzed. The results shows a
better understanding about brand loyalty among customers for companies to analyze and part played by
each element in the progress of brand loyalty.
Ramiz, Qasim, Aslam and Khursheed(2014) investigate what kinds of factors influence brand
loyalty in Pakistan by using self-administered questionnaires we collected data from our 152
respondents. Brand loyalty, Brand image, Brand trust, Customer satisfaction, Perceived quality,

Purchase criteria and Advertising are used as variables. Regression techniques have been used. Results
show significant relationship of brand image, brand trust, customer satisfaction, perceived quality,
purchase criteria and advertising spending on brand loyalty. These factors influence the green purchase
intention.
Saeed, Lodhi, Mehmood, Ishfaque, Dustgeer, Sami, Mahmood and Ahmad (2013) investigate to check
the effect of brand image on brand loyalty and the moderating role of customer satisfaction in it by
taking sample of 150 students and teachers. Brand Image, Brand Loyalty and Customer Satisfaction are
used as variables. Pearson Correlation and Regression techniques have been used. The result shows that
positive and significant relation exists between Brand Image and Brand loyalty and Customer
Satisfaction. It is suggested that Organizations ought to pay special attention to the building of brand
image, achieving customer satisfaction. And through this they would also be successful in achieving
brand loyalty
3. Methodology
3.1 Modeling Framework:
To analyze the impact of customer satisfaction and brand image on brand loyalty, the sample has
been collected through questionnaire survey from 73 respondents and 100% response was received in
which male & female both were captured. The questionnaire survey was conducted at workplaces. The
questionnaire survey contains two sections. First section contains questions that are about respondent
personal profile in which they were asked about gender and age by nominal scaling technique. The
second section contains 15 questions based on dependent variable brand loyalty and independent
variables customer satisfaction and brand image by using 5-likert scaling technique.
The model used in this research is:
Brand Loyalty = + 1 (Brand Image) + 2 (Customer Satisfaction)

4. Results & Estimation

4.1 Reliability
For checking the reliability of the data, we use reliability test by using SPSS. The questionnaire for this
study is based on 15 questions which includes both dependent & independent variables.
Table 4.1.11
Reliability Statistics

Cronbach's Alpha

N of Items
.856

15

The main focus on the value of Cronbachs Alpha which should be more than 0.5 or 50%. Now we can
see that the value of Cronbachs Alpha for this study is 0.856 means 85.6% data is reliable and
acceptable for this study.
Data reliability has been demonstrated by applying statistical tests of reliability. The questionnaire for
this study based on 15 questions which includes both dependent and independent variables. Reliability
test has been applied in SPSS software and according to the limitation; the value of Cronbachs Alpha
should be more than 0.5 means 50%. The Cronbach alpha value of this study is means %, and shows
that the reliability of data should be acceptable.

4.2 Factor Analysis

KMO & Bartletts Test is a measure of sampling adequacy and it shows that how much sample is
accurate for this study. For factor analysis to be recommended suitable, the value of KMO should be
more than 0.5 or 50% and the value of Bartletts test should be less than 0.05 means it should have
significant.

1 See Appendix-A, Table-2, Page#35-36.

Table 4.2.12
KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.

.756

Approx. Chi-Square

503.074

Bartlett's Test of Sphericity Df

105

Sig.

.000

From the above table, the value of KMO is 0.756 means 75.6% and the value of Bartletts test is 0.000
which less than 0.05 means that the factor analysis is significant.

Table 4.2.2

Rotated Component Matrixa

Component
1
SAMSUNG SMART PHONE has good/reasonable
prices.
SAMSUNG SMART PHONE has a large variety of
products.

2
.796
.790

SAMSUNG SMART PHONE offers the greatest

range of different features and prices.

.780

SAMSUNG has a differentiated image from other

smart phones.

.707

I Preseive a very good image of SAMSUNG.

.697

The product is sincere to the customers.

SAMSUNG is known for providing the best quality.

.693

SAMSUNG SMART PHONE is fimiliar to my

needs.

.570

I Would love to recommend SAMSUNG SMART

PHONE to my friends.

.886

SAMSUNG SMART PHONE would be my first

choice when considering smart phones.

.777

I will keep on buying as long as the SAMSUNG

provides me satisfied products.

.687

I Consider myself to be loyal to SAMSUNG

SMART PHONE.

.658

2 See Appendix-A, Table-4, Page#38.

I will not buy another brands of smart phone if

SAMSUNG SMART PHONE is available at the
store.

.623

I relate some specific characteristics of

SAMSUNG SMART PHONE.

.474

In general, I am satisfied with the SAMSUNG

SMART PHONE.

-.606

I feel comfortable when I buy SAMSUNG SMART

PHONE.

.540

Rotated component matrix defines the correlation in the variables to the dependent variable.
The higher the value shows the highest level of correlation to the dependent variable. It also show that
how much independent variables are fit in the data

4.3 Regression Analysis:

Regression analysis is used for forecasting the relationships among variables. It also shows that how
much independent variables effect on dependent variable.
In the table below the R Square value is taken as for explanation of the overall model. The overall
model is 26.5% explained by the variables.

Model Summaryb
Model

R Square

.534

Adjusted R

Std. Error of the

Square

Estimate

.286

.265

.68872

Durbin-Watson

1.803

4.4.2 Independent Sample T-test:

Here we compare the averages of variable across the two categories. i.e. averages of Male and
Female among Brand Loyalty and other variables.
The claim for our data is that variances are equal. I.e. Ho: Variances are equal

Table 4.4.2.1
One-Sample Test
Test Value = 0
t

df

Sig. (2-tailed)

Mean Difference

95% Confidence Interval of the

Difference
Lower

Upper

Brand Loyalty

33.679

72

.000

3.16712

2.9797

3.3546

Brand image

45.174

72

.000

3.55342

3.3966

3.7102

Customer Satisfaction

45.218

72

.000

3.49315

3.3392

3.6471

The above table 4.4.2.1 shows the mean of Male & Female in three of the above variables.

Independent Samples Test

Levene's Test for
Equality of Variances
F
Sig.

Equal
variances
assumed
Brandimage

CustomerSatisfactio
n

0.216

Equal
variances
not
assumed
Equal
variances
assumed

0.906

0.344

Equal
variances
not
assumed
Equal
variances
assumed

BrandLoyalty

1.557

Equal
variances
not
assumed

7.224

0.009

t-test for Equality of Means

T

df

Sig. (2tailed)

Mean
Differenc
e

Std. Error
Differenc
e

95% Confidence
Interval of the
Difference
Lower
Uppe

-0.635

71

0.527

-0.10045

0.15811

0.41572

0.2148

-0.642

68.641

0.523

-0.10045

0.15637

0.41242

0.2115

-1.116

71

0.268

-0.17233

0.15437

0.48013

0.1354

-1.106

65.245

0.273

-0.17233

0.15576

0.48339

0.1387

1.667

71

0.1

0.31008

0.18595

-0.0607

0.6808

1.645

60.93

0.105

0.31008

0.18851

0.06688

0.6870

Table 4.4.2.2 shows leveenes test which tells us whether variances are different or not. In
levenes test we claim that variances are equal. Here we see the sig value for levenes test in first two
cases i.e. Brand Image and Customer Satisfaction is greater than 0.05, thus we accept our claim that is

variances are equal but in case of Brand Loyalty the variance is not equal. Once we accept the claim we
choose row named equal variance assumed to check the sig value of independent sample t-test. In
independent sample t-test we check whether the mean of two different groups is different or not. We
claim that mean of two groups are not different. In all the above cases the sig value is greater than 0.05,
thus we accept our claim that is mean of two groups are not different.
5. Conclusion and Recommendations
It is concluded that the brand loyalty, brand image and the customer satisfaction are correlated with
each other, so companies need to focus on these three factors altogether in order to gain profit and
become stable in the market.
On the basis of all essential tests and past studies we also said that the brand loyalty has significant and
positive relationship with the customer satisfaction and brand image, thus when the customer get high
quality product in reasonable prices the customer become more satisfied and loyal with the specified
product or service.
In this competitive era the price and quality is no more the only differentiation factor among the
various brands, now brand loyalty is the only differentiation factor that is basically the real asset of an
organization or that is not copied by others; hence it is recommended that the companies make serious
commitments to invest in making the brand strategies for the product and services.
This research is also valuable document for Pakistani mobile industry so on the basis of this research it
is recommended that they need to put investment in order to finding out the needs and wants of the
customers related to their product. In other words they need to make their research and development
department more effective in order to garb more and more market share.

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Appendix-A
1. Outliers

N
BL1
BL2
BL3
BL4
BL5
BI1
BI2
BI3
BI4
BI5
CS1
CS2
CS3
CS4
CS5

73
73
73
73
73
73
73
73
73
73
73
73
73
73
73

Case Processing Summary

Cases
Valid
Missing
Percent
N
Percent
100.0%
0
100.0%
0
100.0%
0
100.0%
0
100.0%
0
100.0%
0
100.0%
0
100.0%
0
100.0%
0
100.0%
0
100.0%
0
100.0%
0
100.0%
0
100.0%
0
100.0%
0

N
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

73
73
73
73
73
73
73
73
73
73
73
73
73
73
73

Descriptive
BL1 Mean
95% Confidence Interval for Mean
5% Trimmed Mean
Median
Variance
Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis
BL2 Mean
95% Confidence Interval for Mean

Lower Bound
Upper Bound

Lower Bound

Statistic Std. Error

3.1918
.13181
2.9290
3.4545
3.2131
3.0000
1.268
1.12617
1.00
5.00
4.00
2.00
-.570
.281
-.562
.555
3.1370
.14243
2.8531

Total
Percent
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%

Upper Bound
5% Trimmed Mean
Median
Variance
Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis
BL3 Mean
95% Confidence Interval for Mean
5% Trimmed Mean
Median
Variance
Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis
BL4 Mean
95% Confidence Interval for Mean
5% Trimmed Mean
Median
Variance
Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis
BL5 Mean
95% Confidence Interval for Mean
5% Trimmed Mean
Median
Variance

Lower Bound
Upper Bound

Lower Bound
Upper Bound

Lower Bound
Upper Bound

3.4209
3.1522
3.0000
1.481
1.21695
1.00
5.00
4.00
2.00
-.174
-.734
2.4932
2.2833
2.7030
2.4924
2.0000
.809
.89943
1.00
4.00
3.00
1.00
.021
-.717
3.4521
3.2252
3.6789
3.5023
4.0000
.946
.97241
1.00
5.00
4.00
1.00
-.933
.469
3.5616
3.3252
3.7981
3.6240
4.0000
1.027

.281
.555
.10527

.281
.555
.11381

.281
.555
.11863

Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis
BI1 Mean
95% Confidence Interval for Mean
5% Trimmed Mean
Median
Variance
Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis
BI2 Mean
95% Confidence Interval for Mean
5% Trimmed Mean
Median
Variance
Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis
BI3 Mean
95% Confidence Interval for Mean
5% Trimmed Mean
Median
Variance
Std. Deviation
Minimum
Maximum
Range

Lower Bound
Upper Bound

Lower Bound
Upper Bound

Lower Bound
Upper Bound

1.01361
1.00
5.00
4.00
1.00
-.666
.458
3.0959
2.8788
3.3130
3.1317
3.0000
.866
.93042
1.00
5.00
4.00
1.00
-.620
.275
3.7534
3.5274
3.9794
3.8272
4.0000
.938
.96869
1.00
5.00
4.00
1.00
-.989
1.140
3.4795
3.2458
3.7131
3.4924
4.0000
1.003
1.00152
1.00
5.00
4.00

.281
.555
.10890

.281
.555
.11338

.281
.555
.11722

Inter quartile Range

Skewness
Kurtosis
BI4 Mean
95% Confidence Interval for Mean
5% Trimmed Mean
Median
Variance
Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis
BI5 Mean
95% Confidence Interval for Mean
5% Trimmed Mean
Median
Variance
Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis
CS1 Mean
95% Confidence Interval for Mean
5% Trimmed Mean
Median
Variance
Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis
CS2 Mean

Lower Bound
Upper Bound

Lower Bound
Upper Bound

Lower Bound
Upper Bound

1.00
-.326
-.706
3.7945
3.5782
4.0109
3.8425
4.0000
.860
.92735
1.00
5.00
4.00
1.00
-.648
.207
3.6438
3.4093
3.8783
3.6750
4.0000
1.010
1.00512
1.00
5.00
4.00
1.00
-.492
-.472
3.0548
2.7589
3.3507
3.0609
3.0000
1.608
1.26810
1.00
5.00
4.00
2.00
-.063
-.981
3.8630

.281
.555
.10854

.281
.555
.11764

.281
.555
.14842

.281
.555
.11427

95% Confidence Interval for Mean

5% Trimmed Mean
Median
Variance
Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis
CS3 Mean
95% Confidence Interval for Mean
5% Trimmed Mean
Median
Variance
Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis
CS4 Mean
95% Confidence Interval for Mean
5% Trimmed Mean
Median
Variance
Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis
CS5 Mean
95% Confidence Interval for Mean
5% Trimmed Mean
Median

Lower Bound
Upper Bound

Lower Bound
Upper Bound

Lower Bound
Upper Bound

Lower Bound
Upper Bound

3.6352
4.0908
3.9033
4.0000
.953
.97632
2.00
5.00
3.00
2.00
-.638
-.480
3.6164
3.3747
3.8581
3.6750
4.0000
1.073
1.03589
1.00
5.00
4.00
1.00
-.552
.021
3.3562
3.1349
3.5774
3.3402
3.0000
.899
.94824
2.00
5.00
3.00
1.00
-.075
-1.002
3.5753
3.3591
3.7916
3.5837
4.0000

.281
.555
.12124

.281
.555
.11098

.281
.555
.10847

Variance
Std. Deviation
Minimum
Maximum
Range
Inter quartile Range
Skewness
Kurtosis

BL1

.859
.92673
2.00
5.00
3.00
1.00
-.442
-.676

.281
.555

BL2

BL3

BL4

BL5

BI1

BI2

BI3

BI4

BI5

CS1

CS2

CS3

CS4

CS5

2.

Reliability
Reliability Statistics
Cronbach's
Alpha
N of Items
.564
3

Item-Total Statistics
Scale
Scale Mean if
Brand loyality
Brand image
Customer
satisfaction

Variance if

Item Deleted Item Deleted

7.0665
1.254
6.6210
1.252
6.7560

Corrected

Cronbach's

Item-Total

Alpha if Item

Correlation
.455
.411

Deleted
.329
.402

.265

.612

1.643

ANOVA with Tukey's Test for Nonadditivity

Sum of
Mean
Squares
61.317
7.620
.023a
53.449
53.472
61.092
122.410

df

Square
.852
3.810
.023
.374
.371
.418
.562

Sig

Between People
72
Within
Between Items
2
10.260
.000
Residual Nonadditivity
1
.062
.804
People
Balance
143
Total
144
Total
146
Total
218
Grand Mean = 3.4073
a. Tukey's estimate of power to which observations must be raised to achieve additivity = 1.355.

3. Regression

Model Summaryb
Adjusted R Std. Error of
Model
R
R Square
Square
the Estimate
1
.472a
.223
.201
.66098
a. Predictors: (Constant), customer satisfaction, Brand image
b. Dependent Variable: Brand loyality

DurbinWatson
1.821

ANOVAa
Sum of
Model
Squares
Df
Mean Square
1
Regression
8.769
2
4.385
Residual
30.582
70
.437
Total
39.352
72
a. Dependent Variable: Brand loyality
b. Predictors: (Constant), customer satisfaction, Brand image

F
10.036

Sig.
.000b

Coefficientsa
Unstandardized
Standardized
Model
1
(Constant)
Brand image
Customer

Coefficients
B
Std. Error
1.097
.501
.390
.103

.188
satisfaction
a. Dependent Variable: Brand loyality

.118

Residuals Statisticsa

Coefficients
Beta

Collinearity

.407

t
2.190
3.785

Sig.
.032
.000

.172

1.597

.115

Statistics
Tolerance
VIF
.960

1.041

.960

1.041

Minimu

Std.

m
3.7848
1.19917

Mean
3.1553
.00000

Deviation
.34899
.65173

-2.472
1.804
Value
Std. Residual
-3.844
1.814
a. Dependent Variable: Brandloyality

.000

1.000

73

.000

.986

73

Predicted Value
Residual
Std. Predicted

m
2.2927
-2.54058

Maximu

N
73
73

4. Factor Analysis

Correlation Matrixa
a. Determinant = .000
KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of Sphericity
Approx. Chi-Square
Df
Sig.

Total Variance Explained

Extraction Sums of Squared
Initial Eigenvalues
% of Cumulative
Component
1
2
3
4
5
6
7
8
9
10
11
12

Total Variance
5.301 35.338
2.128 14.185
1.274
8.494
1.145
7.635
.964
6.430
.822
5.480
.696
4.641
.604
4.027
.534
3.563
.452
3.012
.310
2.068
.263
1.750

%
35.338
49.524
58.017
65.652
72.082
77.562
82.203
86.230
89.793
92.806
94.874
96.624

Loadings
% of Cumulative
Total Variance
5.301 35.338
2.128 14.185
1.274
8.494

%
35.338
49.524
58.017

.756
503.074
105
.000

Rotation Sums of Squared

Loadings
% of Cumulative
Total Variance
3.887 25.914
3.495 23.298
1.321
8.806

%
25.914
49.211
58.017

13
.202
1.348
97.972
14
.168
1.123
99.095
15
.136
.905
100.000
Extraction Method: Principal Component Analysis.

Component Matrixa

I Consider myself to be loyal to SAMSUNG SMART PHONE.

SAMSUNG SMART PHONE would be my first choice when considering smart
phones.
I will not buy other brands of smart phone if SAMSUNG SMART PHONE is
available at the store.
I will keep on buying as long as the SAMSUNG provides me satisfied products.
I Would love to recommend SAMSUNG SMART PHONE to my friends.
I relate some specific characteristics of SAMSUNG SMART PHONE.
I Preseive a very good image of SAMSUNG.
SAMSUNG has a differentiated image from other smart phones.
The product is sincere to the customers. SAMSUNG is known for providing the
best quality.
SAMSUNG SMART PHONE offers the greatest range of different features and
prices.
SAMSUNG SMART PHONE has good/reasonable prices.
SAMSUNG SMART PHONE has a large variety of products.
SAMSUNG SMART PHONE is familiar to my needs.
I feel comfortable when I buy SAMSUNG SMART PHONE.
In general, I am satisfied with the SAMSUNG SMART PHONE.
Extraction Method: Principal Component Analysis.
a. 3 components extracted.

5. One Sample T Test

One-Sample Statistics
N
73

Mean
3.1553

Deviation
.73929

.425
.652
.641

.615
.433

.770
.641
.666
.651 -.450

-.511
.640

Rotation Method: Varimax with Kaiser Normalization.

Brand loyality

.707

.604 -.531
.606 -.511
.764

Component Transformation Matrix

Component
1
1
.745
2
-.666
3
-.043
Extraction Method: Principal Component Analysis.

Std.

Component
1
2
3
.652

Std. Error
Mean
.08653

3
.662
.730
.169

.081
.154
-.985

Brand image
Customer
satisfaction

73

3.6008

.77077

.09021

73

3.4658

.67355

.07883

One-Sample Test
Test Value = 0
95% Confidence Interval of
Sig. (2Brand loyality
Brand image
Customer
satisfaction

t
36.465
39.915
43.963

Df

Mean

72
72

tailed)
.000
.000

Difference
3.15525
3.60078

72

.000

3.46575

the Difference
Lower
Upper
2.9828
3.3277
3.4209
3.7806
3.3086

3.6229

6. Independent Sample T Test

Group Statistics
Brand loyality
Brand image
Customer
satisfaction

Demographics
Female
Male
Female
Male
Female
Male

Mean
3.2851
3.0143
3.5075
3.7020
3.4474
3.4857

38
35
38
35
38
35

Std.
Deviation
.60764
.84634
.77659
.76255
.62374
.73250

Std. Error
Mean
.09857
.14306
.12598
.12889
.10118
.12381

Independent Samples Test

Levene's
Test for
Equality of
Variances

F
Brand
loyalty

Sig.

t-test for Equality of Means

df

Equal
variances 3.925 .051 1.580
71
assumed
Equal
variances
1.559 61.260
not
assumed
Brand
Equal
image
variances .081 .777
71
1.078
assumed
Equal
variances
70.700
not
1.079
assumed
Customer Equal
satisfaction variances .807 .372 -.241
71
assumed
Equal
variances
-.240 67.083
not
assumed

95%
Confidence
Interval of the
Sig.
Difference
(2Mean
Std. Error
tailed) Difference Difference Lower Upper
.119

.27080

.17143

-.0710
.61262
2

.124

.27080

.17373

-.0765
.61817
6

.284

-.19452

.18037

-.5541
.16513
7

.284

-.19452

.18023

-.5539
.16488
3

.810

-.03835

.15884

-.3550
.27838
7

.811

-.03835

.15990

-.3575
.28081
0

Impact of Foreign Direct Investment and Unemployment on Economic Growth

Case Study of Pakistan
KAMRANUDDIN (8534)
KAMRANPASHA80@GMAIL.COM
SYED TALAL HASAN (7454)
STALALH@HOTMAIL.COM
OWAIS MAJID (7621)
OWAIS1122@GMAIL.COM
SAQIB AWAN (7935)
SAQIBAWAN30@GMAIL.COM

MBA Program
Submitted to:
Mr. Tehseen Jawaid
Spring (2015)

SECONDARY REPORT

IMPACT OF FOREIGN DIRECT INVESTMENT AND UNEMPLOYMENT

ON

ECONOMIC GROWTH

ABSTRACT:
This paper investigates the impact of Foreign Direct Investment and Unemployment on Economic
Growth (GDP) of Pakistan. This relationship is tested by applying Ordinary Least Square method. The
GDP is taken as dependent viable while FDI and Unemployment are considered as independent
variables. The data used for this is ranging from year 1991 to 2013 of Pakistan. The result shows that
the overall model is significant. There is a positive and significant relationship between GDP and FDI
while the study showed no significant effect of unemployment on GDP.
Keywords: Gross Domestic Product, Foreign Direct Investment, Unemployment, GDP dependent.

1. INTRODUCTION:

Foreign direct investment (FDI) refers to long term participation by a country A into country B (in this
case Pakistan) . It usually involves participation in management, joint-venture, transfer of technology
and expertise. Increasing foreign investment can be used as one measure of growing economic
globalization.
Foreign Direct Investment (FDI) has emerged as the most important source of external resource flows
to developing countries over the years and has become a significant part of capital formation in these
countries. The role of the foreign direct investment (FDI) has been widely recognized as a growthenhancing factor in the developing countries (Khan, 2007). The effects of FDI in the host economy are
normally believed to be; increase in the employment, augment in the productivity, boost in exports and
amplified pace of transfer of technology.
The relationship between Gross Domestic Product (GDP) and unemployment rates can be seen by the
application of Okuns Law. According to the principles established by this law, there is a corresponding
two percent increase in employment for every established one percent increase in GDP. The reasoning
behind this law is quite simple. It states that GDP levels are driven by the principles of demand and
supply, and as such, an increase in demand leads to an increase in GDP. Such an increase in demand
must be accompanied by a corresponding increase in productivity and employment to keep up with the
demand.
GDP and unemployment rates are linked in the sense that both are macroeconomic factors that are used
to gauge the state of an economy. GDP and unemployment rates usually go together because a decrease
in the GDP is reflected in a decrease in the rate of employment.

Unemployment is the macroeconomic problem that affects individuals most differently and severely.
The loss of employment means reduced standard of living and psychological stress. Researchers study
unemployment to identify its causes and to help in policies that affect unemployment. Levinson (2008)
explained that unemployment is associated with social problems such as poverty, crime, violence, a
loss of morale and degradation. The significance of employment lies not only in the income earned but
also the intangible and invaluable benefits it provides including dignity, accomplishment and freedom.
High job opportunities and economic participation would help in reducing poverty and income
inequality. Ernst and Berg (2009) explain that high growth is associated with a high degree of
employment intensity which is a necessary condition for the reduction of poverty. In 2006, 195 million
workers were unemployed, amounting to 6.3% of the world labour force. that same year, 1.37 billion
workers, nearly half of the world workers were considered as working poor implying that they live
less than U$D 2 dollars per day.
2.

LITERAURE REVIEW:

2.1 THEORETICAL BACKGROUND:

Jyun-Yi, Wu and Hsu Chin-Chiang (2008) they examine whether the FDI promote the economic
growth by using threshold regression analysis. The empirical analysis shows that FDI alone play an
ambiguous role in contributing to economic growth based on a sample of 62 countries covering the
period from 1975 to 2000 and find that initial GDP and human capital are important factor in

explaining FDI. FDI is found to have a positive and significant impact on growth when host countries
have better level of initial GDP and human capital.
Laura Alfaro at el (2003) they examine the various links among FDI and GDP growth. They explore
whether countries with better financial systems can exploit FDI more efficiently. Using empirical
analysis using cross-country data between 1975 and 1995 shows that FDI alone plays an ambiguous
role in contributing to economic growth, however countries with well developed financial markets gain
significantly from FDI in their economic growth.
2.2
EMPIRICAL STUDIES:
Amna Imran and Salman analyzed the impact of foreign direct investment (FDI) in Pakistan for the
period 1981 to 2010. It evaluated the GDP growth performance and assessed the historical trends of the
FDI and CPI in Pakistan.The link between gross domestic product (GDP,) foreign direct investment and
Inflation is measured with the help of multiple regression models. GDP in this model is used as
dependent variable whereas FDI and inflation (CPI) are measured as independent variables. According
to the results, the model is overall significant with the positive and significant association of GDP and
FDI while a negative and significant relationship found between GDP and inflation.
Nadeem, Naveed, Zeeshan and Sonia validated the relationship between GDP and FDI . Foreign
direct investment (FDI) is considered as a growth accelerating component that has received a great
attention in developed countries even in developing and less developed countries during recent
years. This model consists of three variables; two independent factors and one dependent factor
i.e. Foreign Direct Investment (FDI), Gross Domestic Product (GDP) and openness to trade (OP). 30
year data from 1983 to 2012 was collected and the cobb-Douglas Production function is used to
test the relationship. For data analysis, they have examined the descriptive statistics, correlation
and regression model. For this they incorporated the production function in regression model. In
brief, their results show that there is a positive relationship between FDI and GDP in Pakistan.
Misbah investigated the impact of foreign direct investment on Growth (GDP) for Pakistan. He
studied a long run relationship between the foreign direct investment and gross domestic
investment in Pakistan. By using cointegration analysis, he demonstrated that there exists a
long run relationship between the two variables. The GDP is taken as dependent viable while FDI is
considered as independent variables. The data used for this analysis is varying from 1980 to 2010. The
result shows that there exists a long term relationship between GDP and FDI.
Lim and Pehlaj analyzed the relationship between Gross Domestic Product and Foreign Direct
Investment. Quantitative approach is conducted by simple regression analysis by Ordinary Least
Square (OLS) to capture the long-term relationship between FDI inflows and GDP in Cambodia. The
data sets are obtained from World Development Indicator (WDI) collected and developed by World
Bank. Gross Domestic Product (GDP) is used as the indicator for economic growth and net FDI
inflows for FDI. Both indicators are annual data set measured in million US dollar from 1993 to 2011.
Limitations on regression analysis include there are only two variables used in this study FDI and
GDP. All data of both variables was in current US dollar in millions. There is only one model (OLS
estimator) was used to determine the relationship between the two variables, the econometric
methodology is limited to examine only the long term relation, and there are only 19 annual

observations, so if the results from this study are considered to use for other purposes rather than
academic purpose, a few more samples and tests should be included (i.e. Error Correction Model and
Causality Test).
Qaisar, Salman, Ali, Hafiz and Muhammad investigated the impact of foreign direct investment on
Growth (GDP) of SAARC countries. The relationship is tested by applying multiple regression models.
The change in GDP is taken as dependent variable while FDI and inflation are considered as
independent variables. The data used for this is ranging from year 2001 to 2010 of SAARC Countries.
The result shows that the overall model is significant. There is a positive and significant relationship
between GDP and FDI while an insignificant relationship between GDP and inflation.
Nuzhat Falki (2009) examined the Impact of FDI on Economic Growth of Pakistan. She collected the
data of FDI from the Handbook of Pakistan Economy-2005 published by the State of Pakistan and the
World Bank Development indicators-2008 from 1980 to 2006 with variables of domestic capital,
foreign owned capital and labor force. With the help of endogenous growth theory and applying the
regression analysis she concluded that FDI has negative statically insignificant relationship between
GDP and FDI inflows in Pakistan.
Jyun-Yi, Wu and Hsu Chin-Chiang (2008) they examine whether the FDI promote the economic
growth by using threshold regression analysis. The empirical analysis shows that FDI alone play an
ambiguous role in contributing to economic growth based on a sample of 62 countries covering the
period from 1975 to 2000 and find that initial GDP and human capital are important factor in
explaining FDI. FDI is found to have a positive and significant impact on growth when host countries
have better level of initial GDP and human capital. Laura Alfaro at el (2003) they examine the various
links among FDI and GDP growth. They explore whether countries with better financial systems can
exploit FDI more efficiently. Using empirical analysis using cross-country data between 1975 and 1995
shows that FDI alone plays an ambiguous role in contributing to economic growth, however countries
with well developed financial markets gain significantly from FDI in their economic growth.
M. Sayeed Alam and Mahmud Zubayer (2010) they founded that in SAARC FDI from outside is more
important than in intra regional investments in most the countries (the only exception is Nepal) where
Indian investments dominated. The concept of some region can be applicable to increase intra regional
FDI. The FDI has a significant impact on GDP of SAARC countries.
Shaari, Hussain and Ab.Halim [16] examined the impact of FDI on the unemploy-ment rate and
economic growth for Malaysia over the period 1980-2010. The resultsof the study showed that FDI
helps in reducing unemployment, creating more domes-tic jobs and also has a positive effect on GDP.
Abbas, Akbar, Nasir , Aman Ullah and Naseem Global Journal of Management and Business Research
Volume 11 Issue 8 Version 1.0 August 2011 investigated the impact of foreign direct investment on
Growth (GDP) of SAARC countries. This relationship is tested by applying multiple regression
models. The change in GDP is taken as dependent viable while FDI and inflation are considered as
independent variables. The data used for this is ranging from year 2001 to 2010 of SAARC Countries.
The result shows that the overall model is significant. There is a positive and significant relationship
between GDP and FDI while an insignificant relationship between GDP and inflation.

3.

MODELING FRAMEWORK

The aim of this study is to examine the impact of Foreign Direct Investment (FDI) and Unemployment
(UEP) on Gross Domestic Product (GDP). The FDI has positive relationship with GDP while UEP has
negative relationship with GDP. For this purpose the data was collected from Ministry of Finance
(www.finance.gov.pk) for Pakistan from period 1991 to 2013. Our model consist of three variable that
are GDP, FDI, UEP of which GDP is dependent variable and FDI and UEP independent variables.

GDP = + 1(FDI) + 2(UEP) + e

1. Estimation and Results
At the beginning the trend in the variables was tested using Stationary Analysis to check whether the
regression we are going to perform is correct or spurious. Stationary Analysis for the detection of
variable that overfits the model. The Hypothesized claim is:
Ho : The Series is Not Stationary
The Unit Root Test for Stationary Analysis confirms that there is a trend at level in GDP and UEP but
no trend at 1st Difference. However in case of FDI there is a trend at Level intercept but no trend at
Level Intercept & Trend. Since there is a trend in FDI at Level Intercept so we are proceeding as per
this assumption. The results of Unit Root Test are mentioned in Table 4.1 below.
Table 4.13
Stationary Test Results
VARIABLES

LEVEL
1ST DIFFERENCE
INTERCEPT INTERCEPT INTERCEPT INTERCEPT

GDP
FDI

Sig.
0.9999
0.1204

& TREND
Sig.
0.987
0.0342

Sig.
0.0317
0.0570

& TREND
Sig.
0.097
0.1968

UEP

0.1829

0.1393

0.0000

0.0001

3 See Appendix-A, Table-12 See Appendix-A, Table 2

HYPOTHESIS:
The hypothesized claim about the study is as follows.
Ho: FDI has no significant impact on GDP
Ho: UEP has no significant impact on GDP
Table 4.1.12
Long Run Determinants of Gross Domestic Product
Variable
C
FDI

Coefficient
31.32652
17.0605

t-Statistic
1.0896
2.4220

Prob value
0.288
0.0251

UEP

14927.91

1.5738

0.1312

Adj. R
D.W

0.30822
0.27518

F-statistic
Prob value

5.9011
0.0000

Source:Authors estimations

To determine the relationship of considered variables, regression technique is applied. Results of the
test are shown in Table 4.1.1. It is clear that there is a significant impact of FDI on GDP. In table we
have regression statistics of our proposed model. The R-square of this model is at a 0.371, which
suggest that the 63% variation in this model is unexplained while the remaining variation of this model
is explained by FDI and UEP. Durbin Watson is 0.27518 so, there was a chance of autocorrelation and
we can check this through Breusch-Godfrey Serial Correlation LM Testi4 and accepted our null
hypothesis that is there is no autocorrelation is present in our model .
In our study we also checked our independent variables i.e. FDI and UEP whether multicollinearity
exist or not. The table 4.3.1 below shows the results. Both the variables shows VIF values 1.104 which
is less than 10. We have no serious issue of multi collinearity.
Table 4.2.11
VARIANCE INFLATION METHOD
FDI
UEP

1.104
1.104

JOHANSEN CO-INTEGRATION TEST:

HYPOTHESIS:
Ho: NO CO-INTEGRATION EXIST AMONG THE VARIABLES
4

Table 4.2.22
Cointegration Test Results
Hypothesized

Trace

5%

Max. Eigen

5%

No. of CE(s)

Statistic

Critical Value

value statistics

Critical Value

None *

47.2230

29.7970
30.6819

21.1316

At most 1

16.5410

15.49471

12.7221

14.2646

At most 2

3.8183

3.8414

3.8183

3.8414

The most important is that when there are more than two variables in the model, there can be more than
one cointegration vector. The approach developed by Johansen (1988, 1991) and extended by Johansen
and Juselius (1990) is considered superior to the Engle-Granger method. This approach provides a
multivariate framework and allows for more than one cointegration vectors. Johansen and Juselius
(1990) have derived two tests for cointegration, namely, the Trace test and the Maximum Eigen value
test. The computed Trace and Maximum Eigen value test statistics are about their corresponding critical
values are presented in Table 4.2.
As shown in table 4.2.2 that Trace statistic is greater than Critical value & Max. Eigen statistic
is greater than Critical value therefore our null hypothesis has been rejected and cointegration exist
among variables.

Graph 4.3
CUSUM and CUSUM of Squares test

We can check consistency of data through CUSUM and CUSUM of Squares test as shown in
the graph 4.3.
In CUSUM test the results are within 2 standard deviations but CUSUM of Squares test show
fluctuation in 1998 till 2011 and outsides the 2 standard deviations. So, we can confirm this through
chow breakpoint test as shown in the table 4.5
CHOW BREAKPOINT TEST:
HYPOTHESIS:
H0: COFFICIENTS ARE NOT DIFFERENT
Table 4.55
Chow breakpoint
Prob.F(3,17)

0.5493

F-statistics

0.727945

In table 4.5 we checked the consistency of beta through Chow breakpoint test by taking the year 1998
and the prob. value that is greater than 0.1 which means that coefficient are not different before and
after 1998 and we can accept our hypothesis that coefficients are not different.
Causality Analysis

5 See Appendix-A, Table-5, Page#16.

The directions of causality between GDP, FDI & UEP remain unspecified. One mode of dealing with
such an issue is to find out the direction of causality using Granger causality method. The usual
Granger causality leads to forged regression results unless the variables in level are co integrated. Also
Granger causality deals with bivariate regression model. On the other hand Toda and Yamamoto (1995)
procedure uses a modified Wald (MWALD) test which can be applied irrespective of order of
integration and also deals with multivariate regression model.
The results of Granger causality test based on Toda and Yamamoto procedure are reported in
Table 5.1. The values in parentheses are probability values.
Table 5.16
Causality Test Result lag1
Dependent
Variables
GDP

GDP

FDI

UEP

0.6062

0.3345

0.3875

0.7673

0.3510

0.5464

FDI
UEP
We

accept our null hypothesis:

GDP does not Granger Cause FDI and GDP does not Granger Cause UEP at lag 1 because prob. values
are greater than 0.1. We accept our hypothesis: FDI does not Granger Cause GDP at Lag 1 because of
the prob value that is 0.3875 and we also accept FDI does not Granger Cause UEP. Our hypothesis
UEP does not Granger Cause GDP because of the prob value that is 0.3510. Hypothesis that UEP does
not Granger Cause FDI has been accepted because prob value is greater than 0.1.
Table 5.1.27
6 See Appendix-A, Table-8, Page#25.
7 See Appendix-A, Table-8, Page#25.

Causality Test Result lag3

Dependent
Variables
GDP

GDP

FDI

UEP

0.0019

0.0531

0.9175

0.9891

0.5393

0.0260

FDI
UEP
We

reject our null hypothesis:

GDP does not Granger Cause FDI because prob value is 0.0531 there is a significant effect of GDP on
FDI at lag 3. This means that the GDP effect at the 3 rd year on FDI. GDP does not Granger Cause UEP
at lag 3 because prob values are greater than 0.1. We reject our hypothesis: FDI does not Granger Cause
GDP at Lag 3 because of the prob value that is 0.0019 but we accept FDI does not Granger Cause UEP.
Our hypothesis UEP does not Granger Cause GDP is accepted because of the prob value that is 0.5393.
Hypothesis that UEP does not Granger Cause FDI has been rejected because prob value is 0.0260 i.e.
less than 0.1.

Conclusion and Implications

This study intend to contribute to the existing literature using time series data of Pakistan and paying
due attention to the standard econometric techniques. The policy implication of this study is that, there
is a significant and positive impact of FDI on GDP economic Growth while unemployment is not
significantly effecting the GDP at first. The government should create positive opportunities to attract
Foreign Direct Investment in the country. On the other hand the inverse relationship has been
confirmed of GDP and Unemployment. A decrease in unemployment will bring economic growth. Vice
versa an increase in GDP will bring about decrease in unemployment. Firm and concrete measures
should be taken for utilization of labor of the country. The FDI should be implemented in the country

such a way that it brings opportunity for the unemployed skilled labor and the overall productivity of
the country and hence real increase in GDP can be obtained.

1.

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