The Impact of Political Stability on Foreign Direct Investment in South Asian Countries Focusing on Afghanistan

Abstract

The main objective of this research paper is to postulate the relationship between political stability and Foreign Direct Investment through panel and time series data analysis for the period of 1996-2017 in South Asia and Afghanistan respectively. This study uses the multiple regression models represented by Generalized Method of Moments (GMM) for South Asia as well as VAR and OLS for Afghanistan. Foreign direct investment is taken as dependent variable and political stability as independent variable including key control variables such as control of corruption, trade openness, and government expenditure. The regression result based on GMM revealed that political stability has positive impact on FDI inflow in South Asia and the rest of control variables such as control of corruption, trade openness are also significant with negative and positive relationships in turn. Furthermore, the findings of VAR and OLS showed that political stability and control of corruption have positive and negative impacts on FDI inflow in Afghanistan but trade openness and government expenditures are not even marginally significant. It is suggested by the result of the study that South Asian countries including Afghanistan are supposed to increase the level of political stability for attracting more FDI inflows through establishing appropriate policies and mechanisms.