Do interest rate, regulatory quality, and price level matter for FDI decisions in BRICS and GCC countries?

Abstract The current study conducted a comparative analysis to determine the effects of interest rate, regulatory quality, and price levels on foreign direct investment (FDI) in four BRICS countries, excluding India and four GCC countries, excluding the UAE and Saudi Arabia, due to unavailable data from 2005 to 2023, with 76 observations in each group of countries. Given the presence of cross-sectional dependence, the study relies on second-generation panel techniques, including the CIPS unit root test and Westerlund cointegration with bootstrap. Long-run relationships are estimated using PMG and CCEMG estimators, which are reported as robustness checks. The main findings indicated that the price level has a significantly positive relationship with FDI in the short run, PMG estimator in BRICS. On the other hand, in the long run, the PMG estimator has a significantly positive relationship between interest rate spread and FDI, and has a significantly negative relationship between price level, regulatory quality and FDI in the GCC. For more robustness, the study used CCEMG, and the findings show that the price level has a significantly positive relationship with FDI and has a significantly negative relationship with regulatory quality and FDI in the long run in BRICS. Meanwhile, the GCC results in CCEMG are consistent with PMG in REG, IRSP, PL and FDI. To fill the research gap, this study analyzed the effects of interest rate spread, regulatory quality, and price level on FDI in BRICS (emerging, diversified economies) and GCC (resource-based, high-income economies). The study’s findings enhance our understanding of how large interest rate spreads and high price levels can lead to shifts in investment amounts in foreign countries, which are essential for balanced economic growth. Furthermore, countries should first address the institutional situation and regulatory frameworks before stimulating FDI.