Impact of Terrorism on FDI Flows to Pakistan

Abstract

This study explores the adverse impacts of terrorism on the net Foreign Direct Investment (FDI) flows to Pakistan. Since 2003, terrorist violence has killed over 52,000 individuals in Pakistan. The unrelenting violence has substantially increased investment and security risks. This study uses time series econometrics to develop theoretically and empirically sound estimates for the impact of terrorism on FDI flows. This study has found that an increase in terrorist violence reduces FDI. Furthermore, the disaggregated analysis by individual sectors explores the nuances in considerations for FDI, where some sectors are affected while others remain immune to terrorism-related risks.

Keywords: Foreign Direct Investment; Terrorism; Pakistan; ARMAX Model

JEL Classification: F23; D74; N45