The Real Exchange Rate-Foreign Direct Investment Controversy in South Africa: An Application of ARDL Approach

This paper examines the relationship between real exchange rate and foreign direct investment. We apply autoregressive distributed lag (ARDL) bounds testing method to estimate short and long-run relationships between the series in South Africa over the period of 1987-2016. The results reveal long-run cointegration relationships among variables are confirmed, implying real exchange rate, domestic market size stimulate the foreign direct investment in the long run. Furthermore, there is significant Granger unidirectional causality foreign direct investment to real exchange rate in short and long run and from market size to trade openness in a short run. This finding further suggests that the exchange rate instability are likely to be substantially harmful to a positive effect of FDI and should be avoided in South Africa.

Download Full-text

The Determinants of Long-run Real Exchange Rate in South Africa: A Fundamental Equilibrium Approach

Global Economy Journal ◽

10.1515/gej-2015-0015 ◽

2015 ◽

Vol 15 (3) ◽

pp. 319-336 ◽

Cited By ~ 1

Author(s):

Bernard Njindan Iyke ◽

Nicholas M. Odhiambo

Keyword(s):

South Africa ◽

Exchange Rate ◽

Real Exchange Rate ◽

Trade Openness ◽

Commodity Prices ◽

Testing Procedure ◽

Terms Of Trade ◽

Bounds Testing ◽

The Real ◽

Long Run

In this paper, we identify the fundamental determinants of the long-run exchange rate in South Africa. We then estimate the equilibrium real exchange rate for this country using a dataset covering the period 1975–2012. In order to account for possible short-run fluctuations in the real exchange rate, we conducted a cointegration test using the ARDL bounds testing procedure. First, we found terms of trade, trade openness, government consumption, net foreign assets and real commodity prices to be the long-run determinants of the real exchange rate in South Africa. Second, we found that nearly 68.06% of the real exchange-rate disequilibrium is corrected annually. Overall, the estimated equilibrium rate indicates that the Rand has been depreciating in real terms over the years. Tightening trade openness is not an option, given international agreements; on the other hand, terms of trade and real commodity prices are determined by the world market. The obvious policy alternative is for South Africa to increase government spending and moderately decrease her net foreign asset position.

Download Full-text

The Short and Long Run Determinants of Foreign Direct Investment in Nigeria

Management & Economics Research Journal ◽

10.48100/merj.v2i4.124 ◽

2020 ◽

Vol 2 (4) ◽

pp. 45-65

Author(s):

Oludayo Elijah Adekunle

Keyword(s):

Foreign Direct Investment ◽

Exchange Rate ◽

Gross Domestic Product ◽

Direct Investment ◽

Capital Expenditure ◽

Trade Openness ◽

Foreign Direct Investment Inflow ◽

Distributed Lag ◽

Autoregressive Distributed Lag ◽

Long Run

What determines foreign direct investment inflows has been a subject of controversies among scholars. As a result of the highlighted gap discussed in this study, the short and long run determinants of foreign direct investment and their effects on foreign direct investment inflow in Nigeria was investigated from 1986 to 2018. Data were analyzed with Augmented Dickey-Fuller and Philip Perron unit root test, Autoregressive Distributed Lag and Pairwise Granger Causality techniques. Evidence of long run dynamic equilibrium relationship was established between foreign direct investment and its determinants. The short and long run coefficients revealed that government capital expenditure and inflation impede the inflow of foreign direct investment both in the short and long run while exchange rate serve as bane to foreign direct investment in the long run. However, gross domestic product and trade openness were found to stimulate the inflow of foreign direct investment in the short and long run. The Pairwise causality result revealed that government capital expenditure, exchange rate and trade openness had independent causality with foreign direct investment while gross domestic product and inflation rate had unidirectional causality with foreign direct investment. Thus, government should allocate more funds for the provision of enabling and investment enhancing environment to promote foreign direct investment inflow. The study added value to previous studies by estimating the short and long run determinants of foreign direct investment using more dynamic and robust technique of Autoregressive Distributed Lag developed by Peseran and Shin (1999). JEL Codes: C32, F21.

Download Full-text

Causal Links between Trade Openness and Foreign Direct Investment in Romania

Journal of Risk and Financial Management ◽

10.3390/jrfm14030090 ◽

2021 ◽

Vol 14 (3) ◽

pp. 90

Author(s):

Malsha Mayoshi Rathnayaka Mudiyanselage ◽

Gheorghe Epuran ◽

Bianca Tescașiu

Keyword(s):

Foreign Direct Investment ◽

Direct Investment ◽

Trade Openness ◽

Test Procedure ◽

Real Effective Exchange Rate ◽

Foreign Direct Investments ◽

Causality Test ◽

Fdi Inflows ◽

Distributed Lag ◽

Long Run

In this increasingly globalized era, foreign direct investments are considered to be one of the most important sources of external financing for all countries. This paper investigates the causal relationship between trade openness and foreign direct investment (FDI) inflows in Romania during the period 1997–2019. Throughout this study, Trade Openness is the main independent variable, and Gross Domestic Product (GDP), Real Effective Exchange Rate (EXR), Inflation (INF), and Education (EDU) act as control variables for investigating the relationships between trade openness (TOP) and FDI inflow in Romania. The Auto Regressive Distributed Lag (ARDL) Bounds test procedure was adopted to achieve the above-mentioned objective. Trade openness has negative and statistically significant long-run and short-run relationships with FDI inflows in Romania throughout the period. Trade openness negatively affects the FDI inflow, which suggest that the higher the level of openness is, the less likely it is that FDI will be attracted in the long run. The result of the Granger causality test indicated that Romania has a unidirectional relationship between trade openness and FDI. It also showed that the direction of causality ran from FDI to trade openness.

Download Full-text

The Determinants of Pakistan’s Trade Balance: An ARDL Cointegration Approach

THE LAHORE JOURNAL OF ECONOMICS ◽

10.35536/lje.2010.v15.i1.a1 ◽

2010 ◽

Vol 15 (1) ◽

pp. 1-26 ◽

Cited By ~ 13

Author(s):

Waliullah Waliullah ◽

Mehmood Khan Kakar ◽

Rehmatullah Kakar ◽

Wakeel Khan

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Money Supply ◽

Trade Balance ◽

Exchange Rate Regime ◽

Annual Data ◽

Impulse Response Functions ◽

Bounds Testing ◽

Distributed Lag ◽

Long Run

This article is an attempt to examine the short and long-run relationship between the trade balance, income, money supply, and real exchange rate in the case of Pakistan’s economy. Income and money variables are included in the model in order to examine the monetary and absorption approaches to the balance of payments, while the real exchange rate is used to evaluate the conventional approach of elasticities (Marshall Lerner condition). The bounds testing approach to cointegration and error correction models, developed within an autoregressive distributed lag (ARDL) framework is applied to annual data for the period 1970 to 2005 in order to investigate whether a long-run equilibrium relationship exists between the trade balance and its determinants. Additionally, variance decompositions (VDCs) and impulse response functions (IRFs) are used to draw further inferences. The result of the bounds test indicates that there is a stable long-run relationship between the trade balance and income, money supply, and exchange rate variables. The estimated results show that exchange rate depreciation is positively related to the trade balance in the long and short run, consistent with the Marshall Lerner condition. The results provide strong evidence that money supply and income play a strong role in determining the behavior of the trade balance. The exchange rate regime can help improve the trade balance but will have a weaker influence than growth and monetary policy.

Download Full-text

Trade Openness and Economic Growth Nexus in Pakistan

Global Economics Review ◽

10.31703/ger.2020(v-iii).03 ◽

2020 ◽

Vol V (III) ◽

pp. 22-33

Author(s):

Ghulam Yahya Khan ◽

Muhammad Masood Anwar ◽

Aftab Anwar

Keyword(s):

Economic Growth ◽

Foreign Direct Investment ◽

Exchange Rate ◽

Interest Rate ◽

Granger Causality ◽

Direct Investment ◽

Trade Openness ◽

Explanatory Variables ◽

Integration Approach ◽

Long Run

This study explores the nexus amongst trade openness and economic growth for Pakistan for 1981-2019. Trade-openness is a dependent variable, and it is measured as imports plus exports to GDP ratio. Economic growth, Foreign Direct Investment, Inflation, Exchange rate, and interest rate are taken as explanatory variables. Co-integration approach by Johansen and Juselius (1988, 1991) has been used for long-run relationships. Results indicate that Trade-Openness has significantly affected the economic growth and other control variables of the study for Pakistan. There exist bidirectional Granger Causality in the selected variables.

Download Full-text

How Trade Openness and Foreign Direct Investment Affect Economy of Pakistan

Revista Gestão Inovação e Tecnologias ◽

10.47059/revistageintec.v11i2.1787 ◽

2021 ◽

Vol 11 (2) ◽

pp. 1641-1653

Author(s):

Noreen Safdar

Keyword(s):

Economic Growth ◽

Foreign Direct Investment ◽

Exchange Rate ◽

Direct Investment ◽

Trade Openness ◽

Time Span ◽

Independent Variables ◽

Long Run ◽

Short Run ◽

The Growth Of Economy

This study is intended to find out how and to what extent FDI and trade openness affect the growth of economy in Pakistan for time span 1980-2018. To examine influence of FDI and trade openness, GDP was used by way of dependent variable whereas FDI, trade openness, exchange rate, and inflation are also taken as independent variables. The ARDL technique is employed in following study to estimate short-run and long-run results. This study concludes that TO have a positive momentous influence on GDP in both long and short run. While Foreign Direct Investment has an optimistic but irrelevant influence on GDP in Pakistan which demonstrates that TO has a more progressive influence on GDP of Pakistan than FDI. Other variables labor force and inflation harm economic growth while the exchange rate affects GDP positively. It is suggested by the study to enhance economic growth, govt should focus on liberalization of trade by reducing tariffs, customs duties, and other types of taxes on exports to enhance the economic growth of Pakistan.

Download Full-text

Impact of Foreign Direct Investment, Trade Openness, Domestic Demand, and Exchange Rate on the Export Performance of Bangladesh: A VEC Approach

Economics Research International ◽

10.1155/2012/463856 ◽

2012 ◽

Vol 2012 ◽

pp. 1-10 ◽

Cited By ~ 4

Author(s):

Bishnu Kumar Adhikary

Keyword(s):

Foreign Direct Investment ◽

Exchange Rate ◽

Direct Investment ◽

Export Performance ◽

Trade Openness ◽

Domestic Demand ◽

Vec Model ◽

Long Run ◽

Short Run ◽

The Impact

This paper investigates the impact of foreign direct investment (FDI), trade openness, domestic demand, and exchange rate on the export performance of Bangladesh over the period of 1980–2009 using the vector error correction (VEC) model under the time series framework. The stationarity of the variables is checked both at the intercept and intercept plus trend regression forms under the ADF and PP stationarity tests. The Johansen-Juselius procedure is applied to test the cointegration relationship between variables followed by the VEC regression model. The empirical results trace a long-run equilibrium relationship in the variables. FDI is found to be an important factor in explaining the changes in exports both in the short run and long-run. However, the study does not trace any significant causal relationship for the cases of trade openness, domestic demand, and exchange rate. The study concludes that Bangladesh should formulate FDI-led polices to enhance its exports.

Download Full-text

Financial and Economic Factors Affecting Foreign Direct Investment - A Panel Estimation Study of the ASEAN-5 Countries

Asia-Pacific Management Accounting Journal ◽

10.24191/apmaj.v16i3-05 ◽

2021 ◽

Vol 16 (3) ◽

pp. 103-131

Author(s):

Geetha Subramaniam ◽

◽

Ratneswary Rasiah ◽

Doris Padmini Selvaratnam ◽

Jayalakshmy Ramachandran ◽

...

Keyword(s):

Foreign Direct Investment ◽

Stock Market ◽

Financial Development ◽

Direct Investment ◽

Trade Openness ◽

Policy Implications ◽

Market Size ◽

Panel Estimation ◽

Pooled Mean Group ◽

Long Run

ASEAN's strength stems from its diversity, which generates a plethora of diverse market opportunities. Over the last few decades, Foreign Direct Investment (FDI) has risen significantly as a major source of international capital transfer, but the COVID-19 pandemic had a detrimental effect on FDI flows, with the outlook for ASEAN remaining highly unpredictable and contingent on the length of the crisis, the efficacy of policy efforts to encourage investment and to mitigate the economic consequences of the pandemic. This study examines the long-run relationships and short-run dynamic interactions between FDI and its determinants comprising of market size, trade openness, stock market capitalisation and financial development over the period 1970 to 2019. The study applies the dynamic heterogeneous panel estimation techniques of Mean Group (MG), Pooled Mean Group (PMG) and Dynamic Fixed Effects (DFE) to analyse a set of macro panel data of the ASEAN-5 countries, to establish the possible relationships between these variables. An analysis of the results reveals the existence of a long-run causality between FDI and its predictors, indicated by the significant error correction terms for the models tested in this study. There is evidence that market size and stock market capitalization significantly contribute to FDI, with market size being the most dominant contributor. Interestingly, the study also reveals that trade openness and financial development are not significant in determining FDI in the selected countries. The study concludes with an examination of policy implications and also sheds some light on the outlook of FDI in ASEAN-5 post Covid 19. Keywords: foreign direct investment, financial development, pooled mean group, ASEAN-5

Download Full-text

Asymmetric effect of real exchange rate risk on foreign direct investment: Empirical evidence in ASEAN-4

Journal of Research in Emerging Markets ◽

10.30585/jrems.v2i3.512 ◽

2020 ◽

Vol 2 (3) ◽

pp. 91-105 ◽

Cited By ~ 1

Author(s):

Jaratin Lily ◽

Mori Kogid ◽

Dullah Mulok ◽

Rozilee Asid

Keyword(s):

Foreign Direct Investment ◽

Exchange Rate ◽

Real Exchange Rate ◽

Direct Investment ◽

The Philippines ◽

Exchange Rate Risk ◽

Asymmetric Effect ◽

Fdi Inflows ◽

Rate Risk ◽

Long Run

This study investigates the asymmetric effect of exchange rate risk (volatility) on the real foreign direct investment (FDI) inflows in Malaysia, the Philippines, Singapore, and Thailand (ASEAN-4) using the Nonlinear Autoregressive Distributed Lag (NARDL) model. The results revealed the occurrence of a long-run asymmetric cointegration between real FDI inflows and real exchange rate risk in the Philippines, Singapore, and Thailand, but not in Malaysia. For the Philippines and Singapore, there is evidence of long-run asymmetry whereas short-run asymmetry exists for the case of Thailand. These findings imply that the asymmetric effects prove to be useful in providing essential information to the related parties on how FDI inflows react to exchange rate risks differently. Therefore, policymakers in ASEAN countries should be concerned about the asymmetric effect of the exchange rate volatility to mitigate the stylized effects of exchange rate movements on FDI inflows.

Download Full-text