The Role of Foreign Direct Investment and Political Stability in Influencing Economic Growth of Pakistan

Abstract

The role of foreign direct investment (FDI) in the gross domestic product growth (GDP) has been a passionate debate, particularly in developing countries like Pakistan, but the relationship between inflows of FDI and GDP is still controversial among the scholars. FDI depends on resident country’s conditions and the attraction of FDI is linked with the financial position and political stability of country. The main purpose of the study is to find out the effect of inward FDI and political stability on gross domestic product and used data from 1996-2019 for Pakistan and used the Autoregressive Distributive lag method for data estimation. The study revealed that FDI has a positive effect on gross domestic product growth in long run, while, has a positive and significant consequence on gross domestic product growth in short run. Government expenditure, political stability, along with labor force has a positive consequence on gross domestic product. Human capital (HK) and capital formation (PK) has a positive consequence on GDP growth in long run but have no consequence on gross domestic product growth in short runs. This study concluded that FDI and political stability has an encouraging effect on gross domestic product growth. This study recommends that the government should focused on the FDI and political stability to influence the economic growth.