Impact of exchange rate on foreign direct investment: A comparative study of Nepal, India and China
Date
2024
Authors
Bhandari, Surya Bahadur
Journal Title
Journal ISSN
Volume Title
Publisher
Department of Economics
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
Description
Keywords
Exchange rate, Currency volatility, Foreign direct investment