Macroeconomic Factors Shaping Foreign Direct Investment Inflows: Evidence from Pakistan

Abstract

This study endeavors to shed light on the intricate dynamics influencing foreign direct investment (FDI) inflows in Pakistan, with a particular focus on the roles played by inflation, exchange rate uncertainty, gross domestic product (GDP), and the presence of military government. By harnessing annual data spanning from 1991 to 2021 and employing OLS regression analysis, this research seeks to unravel the nuanced relationships among these variables and their impact on FDI inflows. The findings of this study align with expectations, revealing that inflation, exchange rate uncertainty, and GDP exert significant influences on FDI inflows in Pakistan over the study period. These results underscore the importance of macroeconomic stability and economic growth in attracting foreign investment.  However, intriguingly, the presence of a military government in Pakistan does not emerge as a significant determinant of FDI inflows according to the empirical analysis. This finding prompts further exploration into the nuanced factors that drive investor perceptions and decisions in the Pakistani context, beyond the political landscape. Overall, the insights gleaned from this study contribute to a deeper understanding of the multifaceted determinants of FDI inflows in Pakistan. By identifying key factors that influence investor behavior, policymakers and stakeholders can develop targeted strategies to enhance Pakistan's attractiveness as a destination for foreign investment, ultimately fostering economic growth and development.