Political Uncertainty and Foreign Direct Investment in Pakistan: An Empirical Analysis

Abstract

This study examines the effect of political uncertainty on FDI inflows for Pakistan with a view to moderating role of governance effectiveness. In an attempt to explore the impact of indicators such as government stability, election years, and macroeconomic variables on FDI, the study, employing annual time series data and a strong econometric framework, including descriptive statistics, unit root testing, Johansen Cointegration and the Autoregressive Distributed Lag (ARDL) approach, finds that government stability is a key force that determines FDI, and the introduction of a democracy affects FDI both positively and negatively depending on the governance situation. Two regression models are specified: a baseline model to measure the direct effects of political uncertainty and also a second model with interaction terms to explain the moderating influence of governance. The results show that political instability and especially government continuity (PUGS) has a very negative effect of reducing FDI inflows. On the other hand, election years sometimes positively affect FDI (PUEY), but this effect is weakened if governance is strong. The relationship between political uncertainty and FDI depicted a way through which governance effectiveness reduces the adverse impacts of uncertainty, while mitigating its speculative benefits. Macroeconomic factors like trade openness and inflation are the positive determinants of FDI, while, on the other hand, exchange rate volatility and irregular GDP growth are found to be deterrent attraction factors. The study’s conclusion is that the following is necessary for foreign sustainable investment: enhancing governance quality, maintaining political stability and consistent macroeconomic policies. Among policy suggestions are institutional strengthening, regulatory continuity during election cycles, and political risk monitoring framework establishment.