Factors Affecting Foreign Direct Investment: The Afghanistan Case

Abstract

This study examined the factors affecting foreign direct investments (FDI) for the case of Afghanistan. Generally, the literature has focused on the factors affecting direct investments towards developing and underdeveloped countries. The primary purpose of this study is to identify the factors affecting FDI inflow to Afghanistan. Different from previous studies, this study examined the effects of the following factors; globalization indices, gross domestic product, export volume, import volume, and exchange rate (USD/AFN) of Afghani. The factors were determined based on a review of the literature. Regarding the interaction across variables, three different regression models were tested to examine the effects of those factors on FDI inflows to Afghanistan. Ordinary Least Squares estimation was employed. According to the results of the integrated model (the model that covers all exploratory variables), globalization has a statistically significant positive effect on FDI, whereas the gross domestic product (GDP) has a statistically significant negative effect on FDI. When we test the effect of GDP and exchange rate (EXC) jointly on FDI, we find the statistically significant positive effect of those variables on FDI. The results of this study recommend the economy politicians in Afghanistan implement exchange rate policies that promote the FDI and to increase the inflowing of FDI into the country.