Global uncertainty, institutional quality, financial development, and foreign direct investment inflows

This study examines the factors affecting foreign direct investment (FDI) with a focus on global uncertainties. Using panel data from 122 countries and the system Generalized Method of Moments (GMM), it finds that FDI drivers vary by economic development. Global uncertainties (WUI) reduce FDI inflows in emerging and middle-income, and low-income economies, as investors seek safer assets and delay long-term projects. Advanced economies, however, show resilience due to their stable macroeconomic and institutional structures. Institutional quality boosts FDI in low-income economies by promoting stability and investor confidence but has no significant effect in advanced or emerging and middle-income economies. Financial development—through stronger markets and access to credit—supports FDI, except in low-income countries. The study also examines how institutional quality and financial development interact with uncertainties. In emerging and middle-income economies, financial development worsens the negative impact of uncertainties on FDI, while strong institutions mitigate it. Conversely, in low-income economies, financial development lessens the impact of uncertainties, but institutional quality is not effective. Overall, the study concludes that global uncertainties negatively affect FDI inflows, but strong institutional frameworks and financial development can help directly or indirectly mitigate this effect across different economic contexts.