Investigating the Impact of Inflation on Foreign Direct Investment in Southern Africa
Investigating the Impact of Inflation on Foreign Direct Investment in Southern Africa

Summary/Abstract: This paper investigated the impact of inflation on foreign direct investment (FDI) and also explored if financial development is a channel through which the impact of inflation on FDI in Southern Africa could be moderated using panel data analysis. Under fixed effects, inflation was found to have had a non-significant positive influence on FDI, random effects show that inflation negatively but nonsignificantly impacted on FDI whereas under the pooled OLS, inflation had a significant negative influence on FDI in Southern Africa. Both fixed effects and pooled OLS found that the interaction between inflation and financial development had an insignificant negative impact on FDI whereas random effects framework shows that FDI was positively but non-significantly affected by the interaction between inflation and financial development in Southern Africa. The policy implication of the study is that Southern African countries needs to implement inflation lowering policies in order to be able to attract FDI inflows. The study also urges Southern African countries to implement policies that ensures a balance of low inflation environment and a developed financial sector in order to sustainably ensure FDI inflows.

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