Abstract
The purpose of the present study is to examine the impact of political risk index, comprising wide range of indicators of institutional quality and political instability, on FDI inflows in Pakistan after controlling for other relevant determinants of FDI. The study employs auto-regressive distributed lag (ARDL) approach to co-integration and an error correction model based on ARDL approach using time series data over the period of 1981–2012. The results revealed that political risk deters FDI inflows in Pakistan both in longrun and short-run period. The result further indicates that GDP per capita and infrastructure are important determinants of attracting FDI flows in Pakistan. However, the high rate of inflation and instability of exchange rate are found to be negatively associated with FDI inflows in Pakistan.
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