ASYMMETRIC IMPACT OF EXCHANGE RATE INSTABILITY ON FOREIGN DIRECT INVESTMENT IN SOME SELECTED AFRICAN COUNTRIES

Abstract

This study examined the asymmetric impact of exchange rate instability on foreign direct investment variables in some selected African countries. A secondary annual time series data covering 1986 to 2024 is used to document the different exchange rate shocks in South Africa, Nigeria and Egypt with the aim of luring foreign direct investment. The panel cointegration test and non-liner ARDL model tools were used in the analysis. The study disaggregated FDI in equity capital, reinvested earning and intra-company loans as proxy for FDI. The panel ADF unit root carried out revealed that only TOP and INR are stationary at level while EC, RE, ICL and EXR became stationary at first deference. The Panel cointegration test showed that there is a long run relationship among the foreign direct investment (FDI) inflow in some selected Africans countries and exchange rate shocks. The PNARDL result showed a negative correlation between interest rates, exchange rates, and EC, RE, ICL. Additionally, a negative (depreciation) exchange rate shock is accompanied by a positive Foreign Direct Investment inflow in some selected Africans countries (South Africa, Nigeria and Egypt). However, the (depreciation) effect of exchange rate is bigger than the (appreciation) effect on Foreign Direct Investment in the study area, is usually delayed one lagged period before becoming asymptotic to the steady state. Despite their inverse relationship, the trade openness has a significant impact on foreign direct investment in South Africa, Nigeria and Egypt at 5% level of significant. The study therefore recommended that measures be put in place to stabilize and reduce rate of exchange rate so as to reduce business failure due to foreign exchange risk for already existing foreign investments in South Africa, Nigeria and Egypt.