Does Exchange Rate Volatility Matter in Foreign Direct Investment? A VECM Analysis on Foreign Direct Investment in Zimbabwe
Keywords:
Exchange Rate; Foreign Direct Investment; Zimbabwe; VECMAbstract
Objectives: The objective of this paper is therefore to determine the impact of exchange rate volatility on foreign direct investment inflows into Zimbabwe. Prior Work: Earlier research on the impact of exchange rate volatility on FDI to a large extent failed to agree, were mixed and produced divergent results. The questions to be answered by this research paper are in this paper “to what extent does exchange rate volatility influence FDI?”. The other question answered in this study says, “does volatility of the rate of exchange significantly affect the foreign direct investment inflows?” Approach: Vector error correction method (VECM) was used for the purposes of this study. Time series data used spans from 1995 to 2022. Results: The error correction term is statistically insignificant. This means in the short run, there is no causality in the rate of exchange equation because all variables are statistically insignificant in the rate of exchange equation. Implications: Basing on the results of the study we suggest policy recommendations aimed at stabilizing foreign exchange rates for Zimbabwe to attract FDI. Value: The conclusion is that stabilization of foreign exchange rates is a critical element of FDI inflows in Zimbabwe.
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