Foreign Direct Investment in Pakistan: The Role of International Political Relations (Muhammad Arshad Khan)


The main focus of this study is to investigate the impact of Pakistan’s international political relations on FDI inflows. To this end, an extensive theoretical and empirical analysis has been carried out over the period 1972-2009. We find that U.S. policies produce no significant influence on long-term capital inflows to Pakistan in the long-run. However, in the short-run U.S. diplomatic policies produces negative influence on inward FDI to Pakistan. This implies that deterioration of U.S.-Pak diplomatic relations exert significant negative impact on capital inflows to Pakistan in the short-run. The results also reveal that domestic investment; financial development, infrastructure and natural resource endowments exert significant positive impact on FDI in the long- as well as-short-run. Trade openness influences FDI inflows negatively in long-run, but produces no significant impact on FDI in short-run. Political risk related factors (i.e. political rights, civil liberties and political repression) produce no significant impact on FDI inflows to Pakistan in the long-run. However, only civil liberties positively correlated with FDI in short-run. Therefore, policies aimed at strengthening resource based, such as encouraging domestic investment activities, continuity of liberalization policies, improvements of local infrastructure promote FDI inflows to Pakistan. More importantly, Pakistan may establish its political ties with major international power, particularly with the United Sates on the basis of mutual interests and dignity and those relations should be consistent, sustainable and predictable.

Working Paper