A Study on the Contribution of Foreign Direct Investment to Economic Growth in Afghanistan

Abstract

Foreign Direct Investment (FDI) is frequently regarded as a key driver of global economic integration because it brings job opportunities, capital investment, and business experience. The current study examines the impact of foreign direct investment on Afghanistan's economic growth using time-series data from 2007 to 2019, which are collected from the World Bank and the International Monetary Fund's annual macroeconomic data sources for the country. Foreign direct investment (FDI), trade (Trd), inflation (InfR), and real interest rate (Int) are independent variables for regressing on this country's gross domestic product (GDP), while "GDP" is as a dependent variable. The method of ordinary least squares (OLS) was utilized to investigate the impact of these variables on Afghanistan's economic growth. For unit root test, the Augmented Dickey-Fuller (ADF) one was utilized, while co-integration, Granger causality, and the Vector Error Correction Model (VECM) were all used to capture two-way linkages between variables and were shown to hold in the long run. Our findings indicate that foreign direct investment and trade have a negative and significant impact on Afghanistan's economic performance in the short run but that all variables except inflation have a positive and significant impact on economic growth in the long run. According to the study, a rigorous policy mix is required to absorb "FDI" while supporting infant industries and reducing Afghanistan's balance of payments deficit for growth and future development.