Inflation and FDI in industrialized and developing economies

This article investigates the effects of inflation on FDI in 74 countries clustered into industrialized and developing economies. Contrary to previous studies, we show that the link between inflation and FDI is nonlinear, with evidence of threshold effects in both industrialized and developing economies. We find that the inflation threshold is about five times higher in developing than industrialized economies. Inflation tends to reduce FDI in industrialized economies after exceeding its threshold whereas in developing economies, its impact on FDI is negative even before exceeding its threshold. We propose that the long-standing evidence of mixed relations between inflation and FDI, which is well documented in the literature, may be explained by the existence of previously ignored threshold effects.