• Dr. Musarrat Shamshir
  • Dr. Samina Sabir
  • Dr. Rukshana Khan


FDI, GMM, Macroeconomic Stability, Terrorism


This study investigates the impact of macroeconomic stability, absorptive capacity, and terrorism on Foreign Direct Investment (FDI) of Pakistan over the period 1975-2015. There exists a problem of endogeneity and omitted variable bias in the macroeconomic stability, absorptive capacity measures and institutional variables. Therefore, we use two stage least square (2SLS) and Generalized Method of Moment (GMM) to tackle the problem of endogeneity and other related problems. We consider macroeconomic stability indicators and terrorism as a measure of socioeconomic variables. Macroeconomic stability, absorptive capacity and GDP per capita growth have positive and significant impact on FDI in Pakistan. We also find that terrorism has negative and significantly impact FDI. Therefore, it is necessary for Pakistan reduce terrorism to attract more FDI in Pakistan.

Author Biographies

Dr. Musarrat Shamshir

Dr. Musarrat Shamshir is currently working as Dean, Faculty of Management Sciences, at Greenwich University. She has a vast experience of conducting and authoring research in Economics and Social and Management Sciences. She can be contacted at:

Dr. Samina Sabir

Dr. Samina Sabir is Assistant Professor at Kashmir Institute of Economics, University of Azad Jammu & Kashmir, Muzaffarabad. She can be contacted at:

Dr. Rukshana Khan

Dr. rukhsana khan is Assistant Professor in the Kashmir Institute of Economics, University of Azad Jammu & Kashmir, Muzaffarabad. Her email is


Abadiea, A., & Gardeazabal, J. (2008). Terrorism and the world economy.
European Economic Review, 52, 1–27.

Alfaro, L., Chanda, A., Kalemli-Ozcan, S., & Sayek, S. (2004). FDI and
Economic Growth:The Role of Local Financial Markets. Journal
of International Economics, 64 (1), 89-112.

Arellano, M., & Bover, O. (1995). Another look at the instrumental
variable estimation of error-components models. Journal of
Econometrics, 68, 29-51.

Arellano, M., & Bond, S. (1991). Some tests of specification for panel
data: Monte Carlo evidence and an application to employment
equations. The Review of Economic Studies, 58 (2), 277-297.

Asiedu, E. (2002). On the Determinants of Foreign Direct Investment to
Developing Countries: Is Africa Different? World Developmen,
30 (1), 107-119.

Bakar, A. N., Mat, S. H., & Harun, M. (2012). The impact of Infrastructure
on Foreign Direct Investment: The Case of Malaysia. Procedia
Social and Behavioral Sciences, 65, 205-211.

Bengoa, M., & Sanchez-Robles, B. (2003). Foreign Direct Investment,
Economic Freedom and Growth: New Evidence from Latin
America. European Journal of Political Economy, 19, 529-545.

Benhabib, J., & Spiegel, M. M. (1994). The Role of Human Capital in
Economic Development Evidence from Aggregate Cross-country
Data. Journal of Monetary Economics, 34 (2), 143-173.

Buckley, P. J., Clegg, J., & Wang, C. (2002). The Impact of Inward FDI
on the Performance of Chinese Manufacturing Firms. Journal of
International Business Studies, 33 (4), 637-655.

Busse, M., & Hefeker, C. (2007). Political Risk, Institutions and Foreign Direct
Investment. European Journal of Political Economy, 23 (2), 397-415.

Durham, J. B. (2004). Absorptive Capacity and the Effects of Foreign
Direct Investment and Foreign Direct Investment. European
Economic Review, 48 (2), 285-306.

Hansen, L. P. (2001). Generalized Method of Moments Estimation: A Time
Series Perspective. International Encyclopedia of Social and
Behavioral Sciences.

Hermes, N., & Lensink, R. (2003). Foreign Direct Investment, Financial
Development and Economic Growth. Journal of Development
Studies, 40 (1), 142-163.

Iqbal, N., & Daly, V. (2014). Rent seeking opportunities and economic
growth in transitional economies, 37(C), 1. Economic Modelling,
37, 16-22.

Khan, M. A. (2012). Foreign Direct Investment in Pakistan: The Role of
International Political Relations . TMD Working Paper Series
No. 039.

Mangla, I. U., & Din, M. (2015). The Impact of the Macroeconomic
Evironment on Pakistan’s Manufacturing Sector. The Lahore
Journal of Economics, 20, 241-260.

Marshall, M. G., Gurr, T. R., & Jaggers, K. (2017). Polity IV Project:
Dataset Users’ Manual v2016. Political Regime Characteristics
and Transitions, 1800-2016. Center for Systemic Peace and
Societal-Systems Research Inc. Center for Systemic Peace.

Pakistan, G. o. (2015-2016). Pakistan Economic Survey. Ministry of
Finance. Islamabad: Finance Division Government of Pakistan.

Sabir, S., Rafique, A., & Abbas, K. (2019). Institutions and FDI: Evidence
from Developed and Developing Countries. Financial
Innovation, 5 (1), 1-20.

Shahbaz, M. (2013). Linkages between Inflation, Economic Growth and
Terrorism in Pakistan. Economic Modeling, 32, 496-506.

Shahbaz, M., & Shabbir, M. S. (2012). Military Spending and Economic
Growth in Pakistan: New Evidence from Rolling Window
Approach. Ekonomska istraz?ivanja,, 25 (1), 144-159.

Shahbaz, M., Shabbir, M. S., Malik, M. N., & Wolter, M. E. (2013). An
Analysis of a Causal Relationship Between Economic Growth
and Terrorism in Pakistan. Economic Modeling, 35, 21-29.

Shahzad, S. J., Zakaria, M., Rehman, M. U., Ahmed, T., & Fida, A. B.
(2015). Relationship Between FDI, Terrorism and Economic
Growth in Pakistan: Pre and Post 9/11 Analysis. Social indicators
Research, 127 (1), 179-194.

Yu, J., & Walsh, J. P. (2010). Determinants of Foreign Direct Investment: A
Sectoral and Institutional Approach. IMF Working Paper,
WP/10/187. Washington, D.C.: International Monetary Fund 2010.

Zaidi, S. A. (2005). Issues in Pakistan’s Economy A Political Economy
Perspective. Oxford: Oxford University Press.

Additional Files