Acta Universitatis Danubius. Œconomica, Vol 14, No 4 (2018)

Abstract

This paper pursued two major objectives: (1) to investigate the impact of inflation on foreign direct investment (FDI) and (2) to explore if financial development is a channel through which the impact of inflation on FDI in Southern Africa could be moderated. Majority of available studies on the subject matter have so far focused on the complementary impact of inflation and FDI on economic growth and have shied away from investigating the direct impact of inflation on FDI. It is against this background that the current paper investigated the inflation-FDI nexus in Southern Africa. Under fixed effects, inflation was found to have had a non-significant positive influence on FDI, random effects show that inflation negatively but non-significantly impacted on FDI whereas under the pooled OLS, inflation had a significant negative influence on FDI in Southern Africa. The mixed findings are all backed by theoretical explanations (see section 5.4). 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.