Assessing the Impact of Foreign Direct Investment on the Probability of Macro-Financial Overheating

The study examines the reasons for the disruption of macrofinancial stability in developing countries, focusing on the abrupt expansion of foreign direct investment (FDI) inflows. An integral index of macrofinancial overheating using a data panel for 79 countries for the period 1990–2020 is constructed. On its basis, using the signaling approach methodology, threshold levels of various variables are determined, the excess of which with a significant probability leads to destabilization. It has been found that the large influx of FDI, along with other factors, may indeed be the cause of such destabilization. The threshold level for safe expansion of FDI inflows has been quantified.