The Effect of Exchange Rate Volatility on Foreign Direct Investment in Ghana

Emmanuel Adu Boahen; Oteng Evans

doi:doi:10.11648/j.ijebo.20140202.12

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The Effect of Exchange Rate Volatility on Foreign Direct Investment in Ghana

Emmanuel Adu Boahen, Oteng Evans

Published in International Journal of Economic Behavior and Organization (Volume 2, Issue 2)

Received: 6 May 2014 Accepted: 26 May 2014 Published: 10 June 2014

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Abstract

Increasingly, Foreign Direct Investment is assuming a prominent role in the development and growth strategies of developing and emerging countries. Using a Vector Autoregressive (VAR) model, this study demonstrates theoretically that nominal interest rate volatility can simultaneously drive exchange rate volatility and impact on Foreign Direct Investment. It then provides an empirical illustration of the bias this endogeneity can cause when regressing measures of exchange rate volatility on foreign direct investment. It is a detailed study that looks at the long – run and short – run movement of exchange rate volatility, interest rate volatility and foreign direct investment by the use of the Vector Error Correction Model. The study also establishes that a stable exchange rate and interest rate improve Foreign Direct Investment inflow into the country. The study however explains that, the effect of interest on Foreign Direct Investment is indirect. It demonstrates that interest rate volatility directly affects exchange rate and market attractiveness which then affects Foreign Direct Investment in the long run. The paper therefore concludes that government should implement policies that will stabilize both the exchange rate and the interest. The study therefore suggests that policies that will reduce importation should be implemented whiles exportation policies should be enhanced and also government external borrowing should be reduced.

Published in	International Journal of Economic Behavior and Organization (Volume 2, Issue 2)
DOI	10.11648/j.ijebo.20140202.12
Page(s)	20-28
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2014. Published by Science Publishing Group

Keywords

Foreign Direct Investment, Volatility, Vector Auto Regression and Co-Integration

References

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[2]	Blonigen, Bruce A. (1997). Firm-Specific Assets and the Link Between Exchange Rates and Foreign Direct Investments. American economic review; 87(3); page: 447-465
[3]	Campa, Joes M. (1993). “Entry by Foreign Firms in the United State under exchange rate un-certainity”, Review of economics and statistics, 75,614-622
[4]	Carkovic, M. and R. Levine (2005). Does Foreign Direct Investment Accelerates Economic Growth. Institute of International Economics, Washington DC page: 195-220
[5]	Contractor, F.(1991). Do government Policies towards foreign direct policies matter? An empirical investigation of the link between national policies and FDI flows. UNCTC current series A(21), United Nations, New York.
[6]	Dunning John H. (994). Re-evaluating the benefits of foreign direct investment. Transactional corporations, vol. 3,no. 1: page 23-51
[7]	Dunning, John H. (1980). Toward an eclectic theory of international production: some empirical tests. Journal of international business studies, vol. 11, no.1; page: 9-31
[8]	Froot, Kenneth A. and Jeremy C. Stein (1991). Exchange Rates and Foreign Direct Investment: An imperfect Capital Markets Approach. http://www.jstor.org/stable/29737961
[9]	Goldberg, Linda S. and Charles Koldstad D. (1995). Foreign Direct Investment exchange rate variability and demand uncertainty. International economic review, 36,855-873
[10]	Government of Ghana Publication, 2002. Ghana Investment Promotion council annual Report 2002
[11]	Government of Ghana Publication, 2006. Ghana Investment Promotion council Quarterly Report 2006
[12]	Grubert Harry and John Mutti, (1991). Taxes, Tarrifs and Transfer Pricing in Multinational Corporation Decision Making. Review of economics and statistics, 74(2): pp. 285-293
[13]	Hansen H. and J. Rand (2006). The Causal Links Between FDI and Growth in Developing Countries. The World Economy. 29(1), page:21-41
[14]	Harrison, Ann (1996). Determinants and Effects of Foreign Direct Investment in Cote d’Ivoire, Morocco and Venezuela. New York: oxford University Press for the World Bank, page: 163-186
[15]	Johansen, S. (1988). Statistical analysis of co-integration vectors. Journal of Economic Dynamics and Control 110; Page: 495-525
[16]	Klein, Mathew W., Joe Peek, and Eric S. Rosengren (1996). Troubled Bank, Impaired Foreign Direct Investment: The Role of Relative Access To Credit. The American Economic Review 92(3),pp. 664-682.
[17]	Kogut, Bruce and Sea, Jin Chang (1996). Platform investment and volatile exchange rate: Direct investment in the US by Japanese Electronic companies. Review of economics and statistics 78(2): pp 221-231
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[19]	Magnus, Frimpong Joseph and Eric Fosu Oteng-Abeyie (2006). Bivariate analysis between FDI inflows and economic growth in Ghana. http://mpra.ub.uni-muenchen.de/351/
[20]	Osterward-Lenum, Michael (1992). A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Co-integration Rank test Statistics. Oxford Bulletin of Economics and Statistics, Vol. 54 (August) , page 461-71
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[22]	Steel, William F (1988). Recent Policy Reform and Industrial Adjustment in Zambia and Ghana. The Journal of Modern African Studies. Vol. 26, page: 157-164
[23]	Swenson, Deborah L(2004). Foreign investment and mediation of trade flows. Review of international economics, 12(4); Page: 609=629
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APA Style

Emmanuel Adu Boahen, Oteng Evans. (2014). The Effect of Exchange Rate Volatility on Foreign Direct Investment in Ghana. International Journal of Economic Behavior and Organization, 2(2), 20-28. https://doi.org/10.11648/j.ijebo.20140202.12

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ACS Style

Emmanuel Adu Boahen; Oteng Evans. The Effect of Exchange Rate Volatility on Foreign Direct Investment in Ghana. Int. J. Econ. Behav. Organ. 2014, 2(2), 20-28. doi: 10.11648/j.ijebo.20140202.12

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AMA Style

Emmanuel Adu Boahen, Oteng Evans. The Effect of Exchange Rate Volatility on Foreign Direct Investment in Ghana. Int J Econ Behav Organ. 2014;2(2):20-28. doi: 10.11648/j.ijebo.20140202.12

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@article{10.11648/j.ijebo.20140202.12,
  author = {Emmanuel Adu Boahen and Oteng Evans},
  title = {The Effect of Exchange Rate Volatility on Foreign Direct Investment in Ghana},
  journal = {International Journal of Economic Behavior and Organization},
  volume = {2},
  number = {2},
  pages = {20-28},
  doi = {10.11648/j.ijebo.20140202.12},
  url = {https://doi.org/10.11648/j.ijebo.20140202.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijebo.20140202.12},
  abstract = {Increasingly, Foreign Direct Investment is assuming a prominent role in the development and growth strategies of developing and emerging countries. Using a Vector Autoregressive (VAR) model, this study demonstrates theoretically that nominal interest rate volatility can simultaneously drive exchange rate volatility and impact on Foreign Direct Investment. It then provides an empirical illustration of the bias this endogeneity can cause when regressing measures of exchange rate volatility on foreign direct investment. It is a detailed study that looks at the long – run and short – run movement of exchange rate volatility, interest rate volatility and foreign direct investment by the use of the Vector Error Correction Model. The study also establishes that a stable exchange rate and interest rate improve Foreign Direct Investment inflow into the country. The study however explains that, the effect of interest on Foreign Direct Investment is indirect. It demonstrates that interest rate volatility directly affects exchange rate and market attractiveness which then affects Foreign Direct Investment in the long run. The paper therefore concludes that government should implement policies that will stabilize both the exchange rate and the interest. The study therefore suggests that policies that will reduce importation should be implemented whiles exportation policies should be enhanced and also government external borrowing should be reduced.},
 year = {2014}
}

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TY  - JOUR
T1  - The Effect of Exchange Rate Volatility on Foreign Direct Investment in Ghana
AU  - Emmanuel Adu Boahen
AU  - Oteng Evans
Y1  - 2014/06/10
PY  - 2014
N1  - https://doi.org/10.11648/j.ijebo.20140202.12
DO  - 10.11648/j.ijebo.20140202.12
T2  - International Journal of Economic Behavior and Organization
JF  - International Journal of Economic Behavior and Organization
JO  - International Journal of Economic Behavior and Organization
SP  - 20
EP  - 28
PB  - Science Publishing Group
SN  - 2328-7616
UR  - https://doi.org/10.11648/j.ijebo.20140202.12
AB  - Increasingly, Foreign Direct Investment is assuming a prominent role in the development and growth strategies of developing and emerging countries. Using a Vector Autoregressive (VAR) model, this study demonstrates theoretically that nominal interest rate volatility can simultaneously drive exchange rate volatility and impact on Foreign Direct Investment. It then provides an empirical illustration of the bias this endogeneity can cause when regressing measures of exchange rate volatility on foreign direct investment. It is a detailed study that looks at the long – run and short – run movement of exchange rate volatility, interest rate volatility and foreign direct investment by the use of the Vector Error Correction Model. The study also establishes that a stable exchange rate and interest rate improve Foreign Direct Investment inflow into the country. The study however explains that, the effect of interest on Foreign Direct Investment is indirect. It demonstrates that interest rate volatility directly affects exchange rate and market attractiveness which then affects Foreign Direct Investment in the long run. The paper therefore concludes that government should implement policies that will stabilize both the exchange rate and the interest. The study therefore suggests that policies that will reduce importation should be implemented whiles exportation policies should be enhanced and also government external borrowing should be reduced.
VL  - 2
IS  - 2
ER  -

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Author Information

Emmanuel Adu Boahen

Valley View University, Techiman, Ghana
Oteng Evans

Valley View University, Techiman, Ghana

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Plain Text BibTeX RIS

APA Style

Emmanuel Adu Boahen, Oteng Evans. (2014). The Effect of Exchange Rate Volatility on Foreign Direct Investment in Ghana. International Journal of Economic Behavior and Organization, 2(2), 20-28. https://doi.org/10.11648/j.ijebo.20140202.12

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ACS Style

Emmanuel Adu Boahen; Oteng Evans. The Effect of Exchange Rate Volatility on Foreign Direct Investment in Ghana. Int. J. Econ. Behav. Organ. 2014, 2(2), 20-28. doi: 10.11648/j.ijebo.20140202.12

Copy | Download

AMA Style

Emmanuel Adu Boahen, Oteng Evans. The Effect of Exchange Rate Volatility on Foreign Direct Investment in Ghana. Int J Econ Behav Organ. 2014;2(2):20-28. doi: 10.11648/j.ijebo.20140202.12

Copy | Download

@article{10.11648/j.ijebo.20140202.12,
  author = {Emmanuel Adu Boahen and Oteng Evans},
  title = {The Effect of Exchange Rate Volatility on Foreign Direct Investment in Ghana},
  journal = {International Journal of Economic Behavior and Organization},
  volume = {2},
  number = {2},
  pages = {20-28},
  doi = {10.11648/j.ijebo.20140202.12},
  url = {https://doi.org/10.11648/j.ijebo.20140202.12},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijebo.20140202.12},
  abstract = {Increasingly, Foreign Direct Investment is assuming a prominent role in the development and growth strategies of developing and emerging countries. Using a Vector Autoregressive (VAR) model, this study demonstrates theoretically that nominal interest rate volatility can simultaneously drive exchange rate volatility and impact on Foreign Direct Investment. It then provides an empirical illustration of the bias this endogeneity can cause when regressing measures of exchange rate volatility on foreign direct investment. It is a detailed study that looks at the long – run and short – run movement of exchange rate volatility, interest rate volatility and foreign direct investment by the use of the Vector Error Correction Model. The study also establishes that a stable exchange rate and interest rate improve Foreign Direct Investment inflow into the country. The study however explains that, the effect of interest on Foreign Direct Investment is indirect. It demonstrates that interest rate volatility directly affects exchange rate and market attractiveness which then affects Foreign Direct Investment in the long run. The paper therefore concludes that government should implement policies that will stabilize both the exchange rate and the interest. The study therefore suggests that policies that will reduce importation should be implemented whiles exportation policies should be enhanced and also government external borrowing should be reduced.},
 year = {2014}
}

Copy | Download

TY  - JOUR
T1  - The Effect of Exchange Rate Volatility on Foreign Direct Investment in Ghana
AU  - Emmanuel Adu Boahen
AU  - Oteng Evans
Y1  - 2014/06/10
PY  - 2014
N1  - https://doi.org/10.11648/j.ijebo.20140202.12
DO  - 10.11648/j.ijebo.20140202.12
T2  - International Journal of Economic Behavior and Organization
JF  - International Journal of Economic Behavior and Organization
JO  - International Journal of Economic Behavior and Organization
SP  - 20
EP  - 28
PB  - Science Publishing Group
SN  - 2328-7616
UR  - https://doi.org/10.11648/j.ijebo.20140202.12
AB  - Increasingly, Foreign Direct Investment is assuming a prominent role in the development and growth strategies of developing and emerging countries. Using a Vector Autoregressive (VAR) model, this study demonstrates theoretically that nominal interest rate volatility can simultaneously drive exchange rate volatility and impact on Foreign Direct Investment. It then provides an empirical illustration of the bias this endogeneity can cause when regressing measures of exchange rate volatility on foreign direct investment. It is a detailed study that looks at the long – run and short – run movement of exchange rate volatility, interest rate volatility and foreign direct investment by the use of the Vector Error Correction Model. The study also establishes that a stable exchange rate and interest rate improve Foreign Direct Investment inflow into the country. The study however explains that, the effect of interest on Foreign Direct Investment is indirect. It demonstrates that interest rate volatility directly affects exchange rate and market attractiveness which then affects Foreign Direct Investment in the long run. The paper therefore concludes that government should implement policies that will stabilize both the exchange rate and the interest. The study therefore suggests that policies that will reduce importation should be implemented whiles exportation policies should be enhanced and also government external borrowing should be reduced.
VL  - 2
IS  - 2
ER  -

Copy | Download