Madrid have long since been linked with a move for Mbappe, which would see the striker work under the tutelage of France and Los Blancos great Zinedine Zidane.
But Modric believes Mbappe may need a move if he is to become the dominant player in world football.
Speaking to La Gazzetta dello Sport, Modric said: "Mbappe has everything to dominate the scene, but I think that to make the leap in quality he needs to go to a championship in which his team does not win so easily.
"I also see great potential in Vinicius Jr and I like [Kevin] De Bruyne and [Raheem] Sterling."
Mbappe still has the opportunity to become a Champions League winner this season, with the completion of the competition set to take place in August having been suspended due to the coronavirus pandemic.
Modric recognizes PSG, who were named Ligue 1 champions after the remainder of the competition was cancelled due to the COVID-19 crisis, as a contender for the Champions League, in which Madrid must overcome a 2-1 first-leg deficit against Manchester City in the last 16 to remain in the hunt.
"In the Champions League I see PSG going well, even if they won't play until August," he added.
"Then it's easy to say Barcelona and Bayern. Watch out for Atletico Madrid and of course among the favorites there will be those who pass between the City and us at Real."