The impact of exchange rate and exchange rate volatility on Mauritius foreign direct investment: A sector‐wise analysis

Abstract

This article analyses the structure of FDI inflow in different sectors of the Mauritian economy. While undertaking this investigation, we primarily allow interaction of FDI with exchange rate and exchange rate volatility and with other equally important macroeconomic variables such as trade openness, human capital, GDP, wages and salaries, gross capital formation, and inclusion of a dummy variable to assess the Mauritian Corporate Income Tax (CIT) reform of 2007. Sectors classified as manufacturing, financial, construction, real estate, tourism, and telecommunication, are considered. Using semi‐annual data spanning from 1990 to 2015, the cointegration bound test reveals a systematic long‐run relationship between the set of variables. This justifies the use of an ARDL model. While exchange rate and exchange rate volatility have negligible impact on FDI inflow in the short run, the ARDL results show that a real depreciation of the Mauritian Rupee against the U.S. dollar over the last decades has been beneficial as it has consistently enhanced FDI inflow in various sectors. Besides, there is evidence that investors in the construction, real estate, and telecommunication sectors, as compared to the financial and manufacturing sectors, are more affected by exchange rate volatility. The ARDL model also suggests that investors are particularly concerned with infrastructure capital, trading opportunity, and human capital, mostly when it comes to labour‐intensive industries such as manufacturing, construction, and tourism. Additionally, the significance of the FDI lag values in the restricted error correction model (ECM) confirms the presence of short‐run dynamism in FDI inflow modelling.

Impact of exchange rate and exchange rate volatility on foreign direct investment inflow for Mauritius: A dynamic time series approach

“…They suggested that a currency depreciation of the host currency significantly increased FDI inflow. These results remained consistent with different modeling strategies such as a panel vector autoregressive model in Kodongo and Ojah (2013) or even with an autoregressive distributed lag model in Muhammad et al (2018) and Moraghen et al (2020). It is noteworthy that Blonigen (1997), Dewenter (1995), Stevens (1998), Y. Xing (2006) and X. Xing and Wan (2006) contradicted these arguments.…”

“…The complexity of the problem is such that it cannot be reduced to a unidimensional one. The inclusion of other classical determinants (as is explicitly demonstrated in Fauzel et al, 2017; Moraghen et al, 2020) is thus necessary to unpack the variance of the dependent variable. Doing so immediately allows for an increasingly precise determination of the consequences of direct and indirect effects between the explanatory variables.…”

Exchange rate dynamics of emerging and developing economies: Not all capital flows are alike

“…For instance, Kyereboah‐Coleman and Agyire‐Tettey (2008) reported that in Ghana RER volatility impacts FDI inflow negatively while FDI is increased due to political factors. Moraghen et al (2020), analysed the impact of exchange rate and exchange rate volatility FDI in on Mauritius, they reported that the exchange rate and exchange rate volatility have negligible impact on FDI inflow in the short run, a real depreciation has been beneficial over the long term in enhancing FDI inflow. Pozo (2001), in a study on the USA, found that FDI increases if exchange rate uncertainty decreases in the short run when using a conditional measure of exchange rate volatility.…”

Exchange Rate Volatility and Macroeconomic Variables in South Africa

“…The findings of this study reveal that gross domestic product, openness, and exchange rate, have a positive relationship with foreign direct investment but, world crude oil prices and volatility of exchange rate have negative relationship with foreign direct investment. Moraghen et al (2020) used semi-annual data from 1990 to 2015 to examine the structure of FDI inflow in different sectors of the Mauritian economy. The cointegration bound test indicated a long-run systematic link between the variables, justifying the usage of an ARDL model.…”