INFLATION VOLATILITY, FDI INFLOWS, AND CAPITAL STRUCTURE DECISIONS IN SOUTH AFRICAN MANUFACTURING FIRMS

Persistent macroeconomic instability remains a critical challenge confronting capital formation decision in South Africa’s manufacturing sector. This study investigates the impact of inflation volatility and foreign direct investment (FDI) inflows on the capital structure decisions of manufacturing firms listed on the Johannesburg Stock Exchange (JSE) from 2012 to 2023, using the debt-to-equity ratio as the dependent variable. The independent variables include annual FDI inflows (in USD) and an inflation volatility index calculated as the annualized standard deviation of monthly inflation rates. The study employed a quantitative, ex post facto design, analyzing secondary panel data obtained from the World Bank, IMF, SARB, JSE filings, and company annual reports. A total of 45 manufacturing firms were purposively sampled for their consistency in reporting financial data over the study period. Analytical techniques included pooled OLS, fixed and random effects models, and robustness checks such as the Hausman test, VIF for multicollinearity, and heteroskedasticity and autocorrelation diagnostics. The findings reveal a significant negative relationship between inflation volatility and the debt-to-equity ratio, while FDI inflows exhibit a positive influence, suggesting that external capital mitigates reliance on domestic debt. These results imply that macroeconomic stability and sustained FDI are critical to optimizing firms’ financing strategies. The study concludes that capital structure decisions in emerging economies are deeply shaped by economic conditions and recommends that policymakers implement inflation-control measures and foster a favorable investment climate to reduce financial vulnerability among industrial firms.