Exchange Rate Volatility And Foreign Direct Investment: Evidence From East Asian Countries

Abstract

This paper uses panel data to examine the effect of exchange rate uncertainty on foreign direct investment in China, Indonesia, Malaysia, the Philippines, South Korea, and Thailand – countries that have continued to attract considerable foreign direct investment (FDI) inflows while also experiencing a great deal of volatility in exchange rates.  After establishing the stationarity of the data series, a panel cointegration test was conducted, following which an error correction model was developed and estimated using two sets of panel data.  The overall estimation results are consistent with theoretical predictions.  We find that exchange rate volatility has a favorable effect on foreign direct investment in our sample countries.