Analysis of Foreign Direct Investment and Inflation Dynamics in the National Resource‐Based Economy
DOI:
https://doi.org/10.61954/2616-7107/2026.10.2-5Keywords:
ARDL Model, Azerbaijan Economy, Inflation, FDI, Unit Root Tests.Abstract
Background. This study empirically investigates the link between Foreign Direct Investment (FDI) and inflation in Azerbaijan, a resource-rich transitioning economy seeking to diversify and stabilise its economic structure. Although FDI is widely regarded as a crucial engine of economic growth, its influence on inflation remains ambiguous, particularly in developing and transitioning economies characterised by structural imbalances and external dependencies. This issue is particularly relevant given Azerbaijan’s ongoing efforts to attract and retain foreign investment while gradually transitioning from an oil-dependent growth model to a more diversified and environmentally sustainable economic structure.
Purpose. This study aims to determine whether FDI inflows contribute to price stabilisation or exert inflationary pressure in the Azerbaijan economy.
Findings. This analysis employs yearly time-series data for 1993–2024, with INF as the dependent variable and FDI as the key independent variable. The official exchange rate is included as a control variable, given its significant influence on domestic prices and foreign investment dynamics. Prior to estimation, the series’ stationarity was tested using the Augmented Dickey-Fuller and Phillips-Perron unit root tests. The Autoregressive Distributed Lag (ARDL) model was used to identify the short- and long-term associations among the series. The estimation results indicate that FDI has a negative, statistically significant impact on inflation in the short and long run. This finding suggests that FDI inflows contribute to lower inflation in Azerbaijan, implying a deflationary effect on the economy. Such supply-side effects may arise from FDI-driven technology transfer, efficiency gains, and capacity expansion, thereby alleviating cost-push inflationary pressure. In contrast, exchange rate depreciation has a positive and persistent influence on inflation, particularly in the long run.
Implication. The findings confirm that FDI acts as a key stabilising force against inflation in Azerbaijan, particularly through supply-side and productivity channels. Simultaneously, exchange rate movements remain a critical source of inflationary pressure that warrants close policy attention.
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