Impact of Foreign Direct Investment on the Economic Growth of Afghanistan

Foreign Direct Investment is generally considered a vital source of economic growth for Afghanistan, bringing in employment opportunities, capital investment, and business knowledge needed for economic growth. This research paper postulates to study the relationship between FDI and economic growth of Afghanistan for the period of 2005-2016 using time series data. Real GDP annual growth rate is taken as a dependent variable and inflation rate, interest rate, exchange rate, FDI, and Unemployment rate are taken as independent variables. The researcher used the multiple regression (OLS) model and empirical analysis for both the IVs and DV over the periods 2005-2016. We used the annual data from World Bank Indicators for Afghanistan. The results of the study discloses that the null hypothesis is rejected showing that FDI has a positive impact on the economic growth of Afghanistan. Meanwhile, the unemployment rate also shows a negative significant relationship with the economic growth rate of Afghanistan and the null hypothesis was rejected, whereas, the interest rate, inflation rate and the exchange rates have positive but insignificant relationship with the dependent variable and the null hypothesis for all these three variables were retained. The study recommends that the government should bring modifications in the domestic market to draw attention of more FDIs in Afghanistan.