The Effect of an Exchange Rate Movements on Net Inflows of Foreign Direct Investment during the Period 1974-2023: An Empirical Study on Egypt

Document Type : Original Article

Author

Economics lecturer in higher institute for computer in King Mariout, Alexandria

Abstract

Foreign direct investment (FDI) is considered one of the most important mechanisms for stimulating economic growth and contributing to economic development and facilitates the transfer of advanced technology to the host country. The significance of the exchange rate lies in the fact that it is the initial link between the investor and the host country. Additionally, Egypt's goal with a Devaluation of currency rate regime was to attract capital inflows while also allowing the economy to absorb external shocks and increase exports.
This study aims to reach the effect of Exchange Rate movements on net inflows of Foreign direct investment in Egypt during the period (1974-2023). The research is based on the hypothesis that there is a statistically significant relationship between the Exchange Rate movements in the Egyptian economy and net inflows of Foreign direct investment. The researcher has adopted a descriptive-analytical econometric approach. The econometric model is based on the cointegration technique and the Autoregressive Distributed Lag (ARDL) model to estimate the long-term relationships, and the Error Correction Model (ECM) to estimate the short-term relationships.
The long-term results indicate the existence of a cointegration relationship among the model's variables, and that the net inflows of Foreign direct investment is negatively affected by Exchange Rate movements during the study period, Which means that the devaluation of the currency attracts foreign investment to Egypt. This result is reached along with the significant and positive effect on net inflows of FDI of the following variables; GDP growth rate, Trade openness and Lending interest rate.  And Inflation rate has a negative and non-statistically impact on net inflows of foreign direct investment and foreign reserves has a positive and non-statistically impact on net inflows of foreign direct investment. From these results, some policy implications and recommendations are provided. The short-term results are also consistent with the long-term results, with some minor differences. Additionally, the model has a high explanatory power.

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