Terrorism and Foreign Direct Investments in Pakistan: A Cointegration Analysis

Abstract

The study is an attempt to explore the long term dynamic relationship between terrorism and foreign direct investment in Pakistan. Monthly time series data from 1995 to 2013 was used for this analysis. After finding all of the time series stationary at first difference, Johansen cointegration approach is applied for finding long run dynamics. Both unidirectional and bidirectional Granger causality are observed between explanatory variables and foreign direct investments. Johanson cointegration approach indicates the presence of long-term dynamic relationship between terrorism and foreign direct investment. The Johanson and juselius cointegration analysis show two cointegrating equations. Terrorism is found to have negative and significant impact on foreign direct investment in Pakistan. The study also suggests some policy implications.

Keywords: Foreign direct investment, Terrorism, Cointegration, Pakistan