Exchange rate uncertainty and foreign direct investment in Africa: Does financial development matter?

The orthodox view is that uncertainty deters investments and, by extension, private capital inflows. Paying specific attention to the volatility of the domestic exchange rate, foreign direct investment (FDI), and financial development indicators, this study investigates the impact of exchange rate u...

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Bibliographic Details
Published in:Review of development economics 2022-05, Vol.26 (2), p.878-898
Main Authors: Asamoah, Michael Effah, Alagidede, Imhotep Paul, Adu, Frank
Format: Article
Language:English
Subjects:
Capital
exchange rate
financial development
Financial institutions
foreign direct investment
Foreign exchange rates
Foreign investment
marginal effects
nonlinearity
Side effects
systems GMM
Uncertainty
Volatility
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Summary:The orthodox view is that uncertainty deters investments and, by extension, private capital inflows. Paying specific attention to the volatility of the domestic exchange rate, foreign direct investment (FDI), and financial development indicators, this study investigates the impact of exchange rate uncertainty on FDI and whether financial development matters in such association. We establish our empirical relationship with a system general methods of moments (GMM) two‐step robust estimator with orthogonal deviations. We found evidence supporting a nonlinear U‐shaped relationship between uncertainty and FDI and that the impact of uncertainty on FDI depends on varying levels of uncertainty. We also document that uncertainty deters FDI flows and that countries with a well‐functioning financial development can transform the adverse impact of volatility on FDI. However, curbing the adverse effect depends on the specific indicator and the threshold value of financial development (financial institutions or financial markets).
ISSN:1363-6669
1467-9361
DOI:10.1111/rode.12858