Effect of Macroeconomic Variables on the FDI inflows: The Moderating Role of Political Stability: An Evidence from Pakistan

This study has examined the moderating role of Political Stability (PS) on the relationships between macroeconomic variables and the Foreign Direct Investment (FDI) inflows in Pakistan. For that purpose, this study used the authentic annual data for the period 1991 to 2011. The empirical analysis involved using the ADF test to check the stationary of the data, the EViews software and hierarchal regression using SPSS 19.0 statistical software package. The results of the study confirmed that that GDP growth rate, exports, imports and balance of payment have positive significant effects on FDI inflows in Pakistan. On the other hand, the inflation rate was not significant in determining the FDI inflows in the country. However, the GDP growth rate and Balance of Payment tends to be a significant determinant of FDI inflows when the moderating effect of the Political stability is accounted for. Based on the findings of this study, it is strongly suggested that political stability is crucial for the country’s domestic and foreign investment expansion in the future course of direction.