Decoding the Drivers of Pakistan's FDI Story: The Role of Democracy

Abstract

With an emphasis on foreign direct investment (FDI) inflows, research on Pakistan's democracy and political corruption can guide policy decisions, and promote sustainable growth by finding viable areas and avoiding risks. Utilizing up to date data, time series data from 1992 to 2021 the study documents significant historical shifts, including the COVID-19 pandemic, the 2008 global financial crisis, the energy crisis, the China-Pakistan Economic Corridor, the war on terror, US sanctions, and the war on terror. The objectives are to find how FDI inflows respond to democracy in Pakistan and to provide valuable policies for the future.  The stationarity of variables is checked by using an Augmented Dicky Fuller (ADF) test. The results of the ADF test show that stationarity in variables is at I(0) and I(1). It justifies the use of an autoregressive distributed lag model (ARDL). The results obtained through the ARDL model reveal that democracy has a positive impact on FDI. It also empirically proves the short-run result convergence towards the long run. Pakistan's democracy faces obstacles such as economic downturns, corruption, and military takeovers. To improve FDI inflows it's required to support a democratic regime, expand trade openness, and strengthen investor protection.