THE ROLE OF ECONOMIC INDICATORS IN FDI INFLOWS: AN EMPIRICAL INSIGHTS FROM PANEL DATA ANALYSIS

Abstract

The study examined the role of key economic indicators in influencing Foreign Direct Investment (FDI) inflows, with a particular focus on the BRICS economies—Brazil, Russia, India, China, and South Africa. Using panel data analysis, the study assessed both short-run and long-run relationships between FDI inflows and macroeconomic determinants, including GDP, exchange rate stability, energy consumption, natural capital, and human capital. The analysis employed advanced econometric techniques such as cross-sectional dependence tests, unit root tests, panel cointegration tests, and the Pooled Mean Group (PMG) estimation to ensure robust and reliable results. The findings of the study have revealed that economic growth and natural capital have a positive long-run impact on FDI inflows, in contrast exchange rate depreciation and increased energy consumption significantly deter foreign investment. Short-run results indicated that exchange rate movements are the most influential determinant of the economic growth, underscoring the importance of currency stability in attracting investors. Additionally, the significant error correction mechanism which confirmed that the presence of a long-run equilibrium relationship, suggesting that deviations from FDI equilibrium are gradually corrected every time. Found that there is a critical role of stable macroeconomic policies and efficient resource utilization in fostering a favorable investment climate. Policymakers are encouraged to implement strategies that enhance economic stability, improve energy efficiency, and leverage natural capital to attract sustainable FDI.