The Impact of Exchange Rate Volatility on Foreign Direct Investment: A Case Study of Pakistan

Abstract

Countries are increasingly focused on attracting Foreign Direct Investment (FDI) and are offering various benefits to foreign investors. FDI has become a global trend, and this study investigates the impact of exchange rate volatility on FDI in Pakistan using data from 1992 to 2022 using FDI, exchange rate, exchange rate volatility, consumer price index (CPI) and trade openness. The study employed unit root testing to assess the stationarity of the variables, followed by the Autoregressive Distributed Lag (ARDL) technique to examine the long-term impacts. The results indicate that trade openness and the Consumer Price Index (CPI) have significant effects, while other variables show insignificant impacts on FDI. Exchange rate volatility, CPI, and trade openness negatively impact FDI, while the exchange rate positively affects it in the long run. The negative coefficient for exchange rate volatility suggests that frequent changes in the exchange rate discourage FDI inflows. Thus, the government of Pakistan should implement policies to stabilize the frequently changing exchange rate.