Foreign direct investment, or FDI, is considered to be one of the most important financial sources for developing countries. FDI is the ownership of 10 percent or more of the shares in a foreign company.

Many developing countries work to attract this type of investment because it comes with many benefits, including greater economic growth, job opportunities, and secondary business development. Although the amount of FDI in developing countries has increased greatly over the past several years, not all developing countries are successful at attracting it. In studying 71 developing countries, I find that inflation targeting policy helps attract greater FDI flows.

This policy separates a country’s central bank from its central government. Such autonomy allows the bank to operate much like the U.S. Federal Reserve, adjusting interest rates during times of recession and boom, but not bowing to pressure from elected officials. Such a policy attracts FDI because it lends a degree of credibility that investors seek because their investments are more likely to remain safe, even during times of uncertainty and instability.

In fact, according to my research, FDI remains strong in developing countries during times of financial crisis if an inflation-targeting policy is in place, especially when compared to countries using different monetary policies. This is good news for developing countries who seek investments to help stimulate their overall economy even during troubled times.

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