Macroeconomic Instabilities and Foreign Direct Investment in Developing countries :Theoretical and Empirical Validation

Abstract This article examines the impact of macroeconomic instabilities on foreign direct investment (FDI) in developing countries. Drawing on a theoretical framework that integrates the OLI paradigm, the theory of irreversible investment under uncertainty, and institutionalist approaches, the study highlights the mechanisms through which inflation, exchange rate volatility, fiscal instability, growth volatility, and political instability influence multinational firms’ location decisions. The empirical analysis is based on panel data from the World Bank and estimations conducted using heteroskedasticity-robust standard errors. The results indicate that macroeconomic instabilities exert a negative and statistically significant effect on FDI inflows, thereby confirming the central role of macroeconomic and institutional credibility in enhancing the attractiveness of developing countries. These findings underscore the need for sustainable macroeconomic stabilization strategies to foster productive capital inflows and support structural transformation. JEL Classification : F21 ; O11 ; E60 ; C23