Impact of Democracy on Foreign Direct Investment: An Empirical Study of Pakistan Economy

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Abstract

This study empirically examines the effect of Democracy on Foreign Direct Investment in Pakistan using annual time series data from 1978 to 2015. Democracy, Gross Domestic Product (GDP), Inflation and the Trade Openness taken as independent variables and the Foreign Direct Investment (FDI) as a dependent Variable. Cointegration, rolling window test, and error correction model indicate the existence of positive significant long run and short run relationship of FDI & Democracy. Result also indicates that all the variable is significantly impact on the FDI in Pakistan context. In contrast, Uni-causality exists in the model that FDI effect on Democracy. In light of the findings, it is suggested that the government should focus on the stability of the law & order situation in Pakistan that we can gain more FDI from the other countries and government should focus more on monetary policy in order to ensure economic growth in the country. It is also recommended that further research should be conducted to find out such different variables which can impact on the Foreign Direct Investment of the country and economic growth in Pakistan.