In the present era most developing countries and Pakistan in particular are attempting to
come up with better economic and financial policies as well as more stable governments to
enhance the prospects of their economies. Pakistan is trying to encourage foreign investment
through more liberal economic policies, political stability and the maintenance of law and
The principal aim of this study is to evaluate the influence of the principal macro-economic
variables in attracting FDI to Pakistan. One of the principal contributions of this study is to
include political instability as a potential risk factor in determining the level of FDI in
Pakistan. As part of this contribution is the construction of political risk indices drawing on
economic and political chronological events in the country for the period of 1970-2004.
The empirical analysis indicates that an improvement in the health of economy by raising per
capita income, lower interest rates (discount rates), and more stable exchange rate, along
with a stable political environment can affect the short-term flows of FDI and the long-run
level of FDI. The policy implications are that in Pakistan policy makers in future must take
into account a wide range of economic and non-economic factors in determining their
policies towards FDI.
A Doctoral Thesis. Submitted in partial fulfillment of the requirements for the award of Doctor of Philosophy of Loughborough University.