IMPACT OF POLITICAL STABILITY AND MACROECONOMIC VARIABLES ON FOREIGN DIRECT INVESTMENT IN PAKISTAN

Abstract

Foreign Direct Investment (FDI) is one of the most important sources of external finance for developing and emerging economies. It supports capital formation, technology transfer, employment creation, export expansion, managerial learning, and long-term productive capacity. Pakistan has repeatedly attempted to attract foreign investment through liberalization, investment facilitation, special economic zones, tax incentives, and sector-specific policies. However, FDI inflows have remained volatile and below potential. Political instability, macroeconomic uncertainty, inflation, exchange rate volatility, policy inconsistency, institutional weaknesses, and security concerns are frequently identified as barriers to sustained foreign investment.This thesis examines the impact of political stability and selected macroeconomic variables on FDI inflows in Pakistan. The dependent variable is FDI inflows measured in US$ billion. The independent variables are Political Stability, GDP Growth, Inflation, and Exchange Rate. The study uses annual data from 2012 to 2024 and applies descriptive statistics, trend analysis, correlation analysis, multiple Ordinary Least Squares regression, diagnostic tests, VIF multicollinearity analysis, and Augmented Dickey-Fuller unit root tests. The regression results indicate that political stability and GDP growth have positive coefficients, inflation has a negative coefficient, and exchange rate has a very small positive coefficient. The R-squared is 0.3566, meaning that the model explains approximately 35.66% of variation in FDI inflows. However, none of the independent variables is statistically significant at the 5 percent level. The results are therefore interpreted as meaningful associations rather than conclusive causal effects.The study concludes that political stability and macroeconomic stability are important components of Pakistan’s investment climate, but FDI decisions also depend on sector-specific opportunities, global capital flows, investor perceptions, governance quality, energy reliability, infrastructure, and security conditions. The thesis recommends strengthening political continuity, controlling inflation, improving exchange rate predictability, protecting investor rights, enhancing contract enforcement, improving governance, and developing sector-specific FDI strategies