Inflation and Foreign Direct Investment in Developed and Developing Economies

This article investigates the effects of inflation on FDI in 74 countries clustered into industrialized and non-industrialized economies. Contrary to previous studies, we show that the link between inflation and FDI is nonlinear, with threshold effects in industrialized and non-industrialized economies. We find that the inflation threshold is about five times higher for non-industrialized countries than industrialized countries. Inflation tends to reduce FDI inflows in industrialized countries only when it is above its threshold, whereas its impact on FDI is negative in non-industrialized countries even when its threshold is not exceeded. We propose that the well-known mixed evidence on the impact of inflation on FDI may be explained by the existence of potential threshold effects