Macroeconomic Volatility and Corporate Investment Behavior: Regime-Dependent Effects of Inflation in Developed and Emerging Economies

Abstract

Introduction: Whether and how firms adjust capital expenditure in response to inflation is a long-standing question in corporate finance, yet the empirical record is unsettled: evidence from developed markets and China links inflation and related uncertainty to lower or distorted investment, whereas evidence from Gulf Cooperation Council markets finds a positive association.
Objectives: This study examines whether firm-level capital expenditure intensity is systematically related to macroeconomic inflation, and whether this relationship differs between developed and emerging economies.
Methods: Using 88,351 firm-year observations for 11,186 listed firms across 85 countries (2002-2023) from LSEG (Refinitiv), merged with World Bank indicators, we estimate industry-fixed-effects panel regressions of capital expenditure intensity on country-year inflation, GDP growth, political stability, leverage, and firm size, with Driscoll-Kraay standard errors.
Results: Inflation shows no significant association with capital expenditure intensity in the pooled sample (β = -0.00004, p = 0.883), but this null result masks two offsetting, regime-specific effects: positive in emerging economies (β = 0.00093, p < 0.01) and negative, marginally significant, in developed economies (β = -0.00036, p < 0.10); a formal interaction test confirms this cross-regime difference is significant (β = -0.00139, p < 0.01). The heterogeneity is robust to firm fixed effects and two-way clustered standard errors, but not to controlling for globally common shock periods: with year fixed effects, or simple indicators for the 2008-09 crisis, COVID-19, and the 2021-22 inflation surge, the interaction term loses significance.
Conclusions: We interpret this as evidence that part of the apparent heterogeneity reflects differential exposure to global shocks rather than a purely structural channel, and report this sensitivity transparently. The analysis is observational and cannot rule out reverse causality. This study is among the first to test the inflation-investment relationship across a harmonised, 85-country panel, and to subject a cross-regime interaction test to explicit global-shock robustness checks.