A study of the economic and social factors in foreign direct investment into Pakistan

In the present era most developing countries and Pakistan in particular are attempting to come up with better economic and financial policies as well as more stable governments to enhance the prospects of their economies. Pakistan is trying to encourage foreign investment through more liberal economic policies, political stability and the maintenance of law and order. The principal aim of this study is to evaluate the influence of the principal macro-economic variables in attracting FDI to Pakistan. One of the principal contributions of this study is to include political instability as a potential risk factor in determining the level of FDI in Pakistan. As part of this contribution is the construction of political risk indices drawing on economic and political chronological events in the country for the period of 1970-2004. The empirical analysis indicates that an improvement in the health of economy by raising per capita income, lower interest rates (discount rates), and more stable exchange rate, along with a stable political environment can affect the short-term flows of FDI and the long-run level of FDI. The policy implications are that in Pakistan policy makers in future must take into account a wide range of economic and non-economic factors in determining their policies towards FDI.