Institutional Quality and Foreign Direct Investment in Fragile States: Evidence from Afghanistan Using the ARDL Bounds Testing Approach (2002–2023)

ABSTRACT: This study empirically examines the impact of institutional quality on Foreign Direct Investment (FDI) inflows in Afghanistan from 2002 to 2023. Utilizing annual time-series data from the World Bank's World Development Indicators (WDI) and Worldwide Governance Indicators (WGI), the study employs the Autoregressive Distributed Lag (ARDL) bounds testing approach. The results confirm a significant positive long-run relationship between political stability, government effectiveness, and FDI inflows. The effect of corruption control is counterintuitive, likely reflecting Afghanistan's aid-dependent investment dynamics. The error correction model indicates a speed of adjustment of approximately 52% per year. Diagnostic tests, including CUSUM and CUSUMSQ, confirm the robustness of the model. Robustness checks using FMOLS and DOLS corroborate the findings. The study provides implications for other fragile economies seeking to improve their investment climate through institutional strengthening and governance reforms. Keywords: Institutional Quality, Foreign Direct Investment, ARDL, Afghanistan, Fragile States.