What is the Effect of Foreign Direct Investment Inflows on Economic Growth in Pakistan? An Empirical Analysis in the Light of Religious Sectarianism as a Catalyst for Terrorism

Abstract

The present study analyzes the effect of sectarian terrorism on the relationship between FDI inflows and economic growth in Pakistan for the period of 1989-2016. Although there are many factors which affect FDI and economic growth relationship but the factor of terrorism specifically related to religion and sects, is being observed as the main hurdle hindering high amounts of FDI inflows to boost economic growth of Pakistan. An empirical relationship has been tested by analyzing two-way causality between FDI inflows and economic growth of Pakistan by using the techniques of Johansen Cointegration test and Vector error correction model (VECM). The results reveal that both FDI inflows and economic growth are being negatively affected by terrorism (religious sectarianism) in Pakistan.

Keywords: FDI inflows, Economic Growth, Sectarianism, Johansen Cointegration, Vector Error Correction, Pakistan