Foreign Direct Investment (FDI) in Pakistan: Measuring Impact of Cost of War Against Terrorism, Political Instability and Electricity Generation

Foreign Direct Investment (FDI) was proven to be a significant source of investment for developing countries which helps to bridge saving-investment gap, creation of employment opportunities, transfer of technology, and ultimately increasing economic growth of the host countries. This study empirically investigated the determinants of FDI for Pakistan for the period 1980 to 2010 by using annual secondary time series data. The study for the first time tested the impact of cost of war against terrorism, political instability, electricity generation, (along with the control variables of market size, inflation rate, exchange rate stability, trade openness and incentives provided to investors) on FDI inflows in Pakistan by using both ARMA model and ordinary least square regression technique. As expected, the estimated results confirmed that the war against terrorism and political instability had negative impact whereas electricity generation had a positive impact on FDI flows in Pakistan. Among the control variables market size, exchange rate stability, trade openness and incentives provided to investors had positively influenced the FDI whereas the inflation rate shown a negative relationship with foreign direct investment flows.