Foreign Direct Investment and Exchange Rate Dynamics
Summary
The dynamic interplay between foreign direct investment (FDI) and exchange rate movements lies at the heart of global financial stability and economic growth. FDI constitutes cross-border equity flows where an investor obtains a lasting interest and significant influence in a foreign enterprise. Exchange rates shape the cost of investment, the valuation of returns and the competitiveness of host economies. Volatile exchange rates can deter investors by increasing uncertainty, while stable or predictable currency regimes may encourage long-term capital commitments. The relationship is bidirectional. Inward FDI can affect exchange rates through capital account transactions, financing local currency appreciation in the short term, while outward FDI may alter foreign earnings repatriation and exchange demand. Empirical research spans a range of methodologies—from vector autoregression and panel estimation to structural models examining policy shocks—and covers advanced, emerging and developing economies. The evidence suggests that the composition of capital flows is critical: portfolio investments tend to induce sharper short-term exchange rate adjustments than direct investments, which are generally more stable and driven by strategic, rather than purely financial, motives. Understanding this nexus is vital for policymakers seeking to attract long-term investment while maintaining currency stability and macroeconomic resilience.
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Foreign Direct Investment and Exchange Rate Dynamics publication trend
The graph below shows the total number of articles in foreign direct investment and exchange rate dynamics across all publications each year (not limited to Nature Index journals).
Technical terms
Foreign Direct Investment (FDI): Cross-border investment in which an investor acquires a lasting interest and significant influence in a foreign enterprise.
Real Exchange Rate: The relative price of domestic goods in terms of foreign goods, adjusted for price level differences between countries.
Exchange Rate Volatility: The degree of fluctuation in the exchange rate over time, often quantified through statistical measures of dispersion or conditional heteroskedasticity models.
Autoregressive Distributed Lag (ARDL) Model: An econometric approach that captures short-run dynamics and long-run relationships between variables in time-series data.
References
- Exchange rate dynamics of emerging and developing economies: Not all capital flows are alike. International Journal of Finance & Economics (2022).
- The Impact of Renminbi Exchange Rate and Exchange Rate Volatility on China's Outward Foreign Direct Investment. Frontiers in Business Economics and Management (2023).
- How Does the Exchange Rate and Its Volatility Influence FDI to Canada? A Disaggregated Analysis. Journal of Risk and Financial Management (2024).
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