Fluctuations in political risk indicators and their impact on FDI inflow in Pakistan

ABSTRACT

The objective of this paper is to investigate the effects of fluctuations in selected political risk indicators on foreign direct investment in Pakistan. The results of time series data from 1984 to 2013 showed that there is a significant variation in all selected political risk indicators. The fluctuations recorded in political risk indicators during the last three decades demonstrate a strong relationship with the variation in the foreign direct investment inflow in Pakistan. The ARDL results show that there exist a co-integrated relationship between political risk indicators and foreign direct investment. Our results show that the government stability and low external conflicts encourage the inflow of foreign direct investment in the long run while investment profile in the short run. The internal conflicts and poor law and order situation discourage the inflow of foreign direct investment in the long run. Our study suggests that the government and its institutions must focus on minimizing the political risk indicators to make visible improvements to attract more inflow of foreign direct investment in Pakistan especially from China and other developed countries.

KEYWORDS:

• Political risk
• fluctuation
• foreign direct investment
• institutions
• Pakistan

JEL CLASSIFICATION:

• D72
• E02
• F23

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Muhammad Asif is Assistant Professor in the Management Sciences Department, COMSATS University Islamabad, Abbottabad Campus, Islamabad, Pakistan.

Abdul Majid is Associate Professor in the Management Sciences Department, Hazara University, Mansehra, Pakistan.

Muhammad Yasir is Associate Professor in the Management Sciences Department, Hazara University, Mansehra, Pakistan.

Amjad Ali Assistant Professor in the Management Sciences Department, COMSATS University Islamabad, Abbottabad Campus, Islamabad, Pakistan.