The Impact Of Exchange Rates On Foreign Direct Investment: Evidence From Developing And Developed Countries

Abstract

This research explores the impact of Exchange Rate on Foreign Direct Investment (FDI) among developing and developed countries, focusing on understanding the dynamic impact of these two variables. Utilizing a panel data approach covering a diverse set of countries and 20 years time periods, the study employs advanced econometric techniques to analyze the direction influence of Exchange Rates on Foreign Direct Investment (FDI). The findings indicate a high positive effect characterized by directional causality and significant heterogeneity of Exchange rate on FDI inflows across 34 countries over the period 2003 to 2022. The methodology involved applying four econometric models - Pooled OLS Regression Model, Fixed-effects Model (FEM), Random-effects Model (REM) and Generalized least squares (GLS) to test the research hypotheses. The study further investigates the role of macroeconomic factors - Gross Domestic Product (GDP) Growth, Interest Rate, Inflation Rate, Trade Openness, Political Stability in shaping this effect. This research also contributes to the literature by providing insights into the mechanisms through which FDI and exchange rates interact and offering implications for policymakers and investors seeking to navigate the complexities of global capital flows and currency markets.