Integrated Model to Measure the Impact of Terrorism and Political Stability on FDI Inflows: Empirical Study of Pakistan

Abstract

To condense saving-investment gap, transformation of technology, creation of employment opportunities and more importantly, increasing economic development of host countries, Foreign Direct Investment (FDI) is proven to be a significant source of investment predominantly for developing countries. Numerous standing studies have scrutinized the economic impact of terrorism and political stability by referring to decrease in FDI. This study empirically enlightens the determinants of FDI for Pakistan over the period 1970 to 2013, by using annual secondary time series data. Adopting the optimistic approach, in this study, variables in the combination of terrorism, political stability, trade openness and GDP have been analyzed applying Ordinary Least Square (OLS) method. As expected, the projected results confirm that GDP, trade openness and political stability have positive and significant impact whilst terrorism has negative influence on FDI inflows in Pakistan. Because of the political stability along with stable GDP growth rate, inverse impact of terrorism has been found statistically insignificant.