BUSINESS CYCLES AND CORPORATE INVESTMENT DECISIONS: EVIDENCE FROM DEVELOPING MARKETS

Abstract

Business cycle fluctuations play a critical role in shaping corporate investment decisions in developing economies, where firms often operate under volatile macroeconomic conditions and limited access to external finance. Using a balanced panel of 400 firm-year observations from ten developing markets, the analysis integrates GDP growth, leverage, cash flow, firm size, and institutional quality to assess key determinants of investment behavior. Results indicate that stronger GDP performance significantly increases investment, while high leverage constrains capital spending due to elevated financial risk. Cash flow remains a dominant factor, reflecting firms’ dependence on internal financing in environments with underdeveloped credit markets. Institutional quality further strengthens investment performance, underscoring the importance of regulatory stability and effective governance. The findings emphasize the need for improved financial systems and enhanced institutional frameworks to support resilient investment and sustainable economic development across developing countries