Impact of exchange rate on foreign direct investment: A comparative study of Nepal, India and China

Abstract

This paper empirically investigates the impact of exchange rate volatility on FDI in Nepal, India and China respectively using time series data from 1990-2022. Data used in study is from secondary source specially from UNCTAD. It observed that the foreign direct investment in Nepal increased by 10.96 times in absolute terms, the FDI in India increased by 208.52 times in absolute terms whereas, the FDI in China increased by 54.24 times in absolute terms during the study period. The percentage of FDI inflows to GDP at current price range is - 0.10% to 0.54% in Nepal, 0.03% to 3.72% in India and 0.88% to 5.98% in China, during the study period. The exchange rate shows that, the 4.26 times decrease in value of Nepalese rupee in terms of US dollar, the 4.49 times decrease in value of Indian rupee in terms of US dollar and 1.41 times decrease in Chinas Yuan in term of US dollar during the study period. For the selection of the model’s lag duration, the Akaike information criteria (AIC) is employed. The Autoregressive Distributed Lag (ARDL) model is used to investigate the effects of exchange rate volatility on Foreign Direct Investment (FDI). The empirical results show that the estimated coefficient of nominal exchange rate volatility is negative in all the selected countries but significant only in India and China. In short, the currency volatility of the host country leads to decrease the FDI inflows into that country.

Keywords: Foreign Direct Investment, Exchange rate, Currency Volatility