Impact of Cultural, Economic and Political Factors on FDI and Trade Scenario:Empirical evidence from Afghanistan

Foreign direct investment is a critical and leading effective component of economic growth and is influenced by many economic, political and cultural factors. Foreign direct investment is a major form of international capital transfer and has increased substantially over the last decades as a consequence of rising global economic integration. It has even grown faster than world GDP and merchandise trade despite the large drop in world FDI flows at the turn of the millennium. The two-way flow between developed countries still accounts for the largest part of asset trade. To this end, an extensive theoretical and empirical analysis has been carried out over the period 2005-2019. This paper has tried to contribute empirical findings and results to the question of what way economic, cultural and political factors influence FDI inflows. Therefore, this paper investigated a set of bilateral Afghanistan inward FDI stock data for the period 2005-2019 in a panel with 15 countries. Cultural differences proved to have a significant negative effect on bilateral FDI stock. Also, the results demonstrated a significant effect of the type of legal family in a country on FDI. However, the effect of belonging to the same legal family is negative. The political situation in a country proved to be a significant determinant of bilateral FDI stock. Countries with a low political rank divert more FDI to Afghanistan. The results reveal that U.S. policies produce no significant influence on long-term capital inflows to Afghanistan in the long run. However, in the short-run U.S. diplomatic policies produce a negative influence on inward FDI to Afghanistan. The results also reveal that domestic investment; financial development, and infrastructure exert a significant positive impact on FDI in the long- as well as short-run. More importantly, Afghanistan may establish its political ties with major international powers, particularly with the United States based on mutual interests and dignity and those relations should be consistent, sustainable and predictable.