The Impact of Economic Stability on Foreign Direct Investments in E7 Countries: A Panel Fourier Toda-Yamamoto Causality

This study examines the impact of the economic stability index, which encompasses macroeconomic variables, such as economic growth, per capita Gross Domestic Product (GDP), inflation, current account balance, and budget balance, on foreign direct investment (FDI) in the E7 countries, which are emerging market economies (China, India, Brazil, Mexico, Indonesia, Russia, and Türkiye) for the period 1992-2023. Panel DOLSMG and Panel Fourier Toda-Yamamoto causality tests were used in the analysis, and gross fixed capital formation and trade openness were included in the model as control variables. The Panel DOLSMG findings indicate that all variables have positive and significant effects on FDI at the panel level. However, differences were observed by country. While economic stability had a positive effect in Türkiye, Indonesia, Russia, and Mexico, no significant relationship was found in the other countries. Gross fixed capital formation had a positive effect in China, Indonesia, Russia, and Türkiye, and a negative effect in India. Trade openness had a positive effect in India, Brazil, Mexico, Russia, and Türkiye, but was negative in Indonesia and insignificant in China. According to the results of the Fourier TY causality test, a one-way causality relationship was found between economic stability and FDI, while a two-way causality relationship was found between gross fixed capital formation and FDI. In particular, a one-way causality relationship between economic stability and FDI was found in Türkiye, Indonesia, and Russia. In terms of gross fixed capital formation, there is a one-way relationship from gross fixed capital formation to FDI in Brazil, Indonesia, and Türkiye. While no overall causal relationship was found for trade openness, a relationship was found only in Mexico.