Examine the effect of market size on Foreign Direct Investment inflow: Evidence from Afghanistan economy

Abstract

This study was conducted to scrutinize the effect of market size on Foreign Direct Investment (FDI) inflow in Afghanistan (2001-2023) and employed an autoregressive distributed lag (ARDL) model for estimation. This study found that GDP per capita, financial development, inflation rate, population growth (POP), and political stability (PS) have an optimistic and significant effect of FDI inflow in the long run (LR). However, all the variables included in the model have insignificant effect on FDI in the short run (SR). The ECM value shows the 57% rate of convergence to LR equilibrium and the bound test rejects the null hypothesis , meaning that there is an exit from the LR cointegration. Therefore, the market size has significantly contributed to the FDI inflow. Based on the result, this study recommended, to enhance FDI, the government should expand market size (MSz), and financial development, while, lower inflation and political instability in order to attract FDI.