The impact of exchange rate volatility on foreign direct investment (FDI) in BRIC countries

Abstract

The paper is aimed at exploring the relationship between exchange rate volatility and foreign direct investment in selected emerging economies, specifically, Brazil, Russia, India, and China (BRIC). The sample of data was selected over the period of 1994-2012 for both exchange rate volatility and foreign direct investment for all countries. The standard deviation of monthly exchange rate changes is applied to examine the exchange rate volatility and its influence upon foreign direct investment using an Autoregressive Distributed Lag (ARDL) approach and the Cointegration and Error Correction Model, developed by Pesaran, Shin and Smith (2001). The results indicate a negative long-run relationship between exchange rate volatility and foreign direct investment for India and Russia. The existence of a short-run association was found in China, India, and Russia. However, for Brazil no connection between the two variables was observed.