Linkage between International Political Relations and Foreign Direct Investment: A Case Study of Afghanistan

Abstract

Foreign direct investment is a critical and leading effective component of economic growth and is influenced by many economic and political, including international political relations. The main focus of this study is to investigate the impact of Afghanistan's international political relations on FDI inflows. To this end, an extensive theoretical and empirical analysis has been carried out over the period [2005][2006][2007][2008][2009][2010][2011][2012][2013][2014][2015][2016][2017][2018]. The results reveal that U.S. policies produce no significant influence on long-term capital inflows to Afghanistan in the longrun. However, in the short-run U.S. diplomatic policies produces negative influence on inward FDI to Afghanistan. This implies that deterioration of U.S.-Afghanistan diplomatic relations exerts significant negative impact on capital inflows to Afghanistan in the short-run. The results also reveal that domestic investment; financial development, infrastructure and natural resource endowments exert significant positive impact on FDI in the long-as well as-short-run. Trade openness influences FDI inflows negatively in longrun, but produces no significant impact on FDI in short-run. Political risk related factors (i.e. political rights, civil liberties and political repression) produce no significant impact on FDI inflows to Afghanistan in the long-run. However, only civil liberties positively correlated with FDI in short-run. Therefore, policies aimed at strengthening resource based, such as encouraging domestic investment activities, continuity of liberalization policies, improvements of local infrastructure promote FDI inflows to Afghanistan. More importantly, Afghanistan may establish its political ties with major international power, particularly with the United Sates on the basis of mutual interests and dignity and those relations should be consistent, sustainable and predictable.