FDI location and exchange rates. is there really a relationship between the two?

Abstract

The exchange rate led foreign direct investment (FDI), FDI led exchange rates and feedback effect hypotheses summarise the literature around the nature of the relationship between FDI and exchange rates. So many authors on this subject over a long period have been found to generally side with of the above-mentioned hypothesis or another without a consensus. Despite this lack of consensus with regard to the exact nature of the causal relation between these two variables, what is coming out clearly from the literature is that there indeed exist a relationship between FDI and exchange rates. The lack of consensus has prompted this current study that used the ARDL (Autoregressive distributed lag)-bounds testing approach. The study revealed the existence of causality from (1) the rand value to FDI in the long run and (2) FDI to the rand value only in the short run in South Africa. The author recommends that policies which strengthen the value of the rand should be put in place in order to attract FDI in the long run. The flow of FDI into South Africa will in turn not only stabilises the value of the rand.

An empirical study of the real effective exchange rate and foreign direct investment in Vietnam

“…Testing results of the VAR model show that the real effective exchange rate and FDI have a two-way relationship. This result is consistent with previous studies such as Kosteletou and Liargovas (2000), Shrikhande (2002), Lee (2015), and Tsaurai (2015). At the same time, the research results show that the effective FDI and exchange rate variables were most affected by these factors in the past.…”

“…Similarly, Jongwanich and Kohpaiboon (2013) and Tsaurai (2015) also show that FDI inflows have an impact on real exchange rates. The results show that the exchange rate and FDI relations differ among countries Tsaurai (2015). finds that there is a causal relationship between (1) South African rand value and FDI in the long run, and (2) FDI and the rand value only in the short run in South Africa.…”