Foreign Direct Investment Under Uncertainty: A Regime-switching, Threshold and Dynamic Correlation Analysis of Emerging Economies

This article examines how foreign direct investment (FDI) inflows adjust to changing macroeconomic environments in emerging economies by emphasizing state-dependent behaviour rather than average linear responses. Using a panel of 50 emerging market economies covering the period 2010–2023, the study integrates Markov regime-switching models, panel threshold estimation, and dynamic conditional correlation (DCC-GARCH) techniques to capture non-linear investment responses to growth conditions, financing costs, and institutional stability under varying uncertainty regimes. The results identify three economically meaningful regimes—stable, volatile, and growth—and reveal significant threshold effects in key macro-financial drivers, indicating that FDI responses intensify once critical levels are crossed. The findings further show that uncertainty reshapes cross-variable dependence over time, highlighting that investment resilience is governed by non-linear adjustment mechanisms. These results suggest that policies aimed at attracting FDI should be designed with explicit attention to regime and threshold conditions, particularly regarding macroeconomic stability and institutional credibility.