Exchange Rate Variability and Foreign Direct Investment: Evidence From Panel Models

Abstract

During the past few decades, exchange rate volatility has continued to increase in prominence. Notably, small, open economies, have sparked empirical examination regarding exchange rate uncertainty effects on macroeconomic variables, including foreign direct investment flows. The following study elucidates the exchange rate risk’s relationship to and foreign direct investment flows and purporting increased exchange rate risks and uncertainty may reduce foreign direct investment flows. The analyses were gleaned data from 51 countries from 1998 to 2017. A GARCH (1,1) model first estimated alternatively measured exchange rate uncertainty. The estimated exchange rate volatility with two alternative methods was then included in panel data models using fixed and random effects estimation techniques, as well as an Arellano Bond linear dynamic panel data model.