Munich Personal RePEc Archive

Does the exchange rate volatility affect the foreign direct investment? the case of Thailand

Mosteut, Safini and Masih, Mansur (2017): Does the exchange rate volatility affect the foreign direct investment? the case of Thailand.

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A country’s economic growth and stability can be seen from their inflow of foreign direct investment, high gross domestic product and high exports, but somehow their exchange rate risk i.e. depreciation or appreciation can be worrisome to the home country and foreign investors as well. A daunting situation would be the volatility of their currency exchange, whether less volatile or high volatile is good for their economy and whether it can attract or deter foreign investors to invest in their country. This study aims to explore whether exchange rate volatility affects the inflow of foreign direct investment in Thailand using the standard time series techniques. The temptation to study this issue is because of the curiosity to know whether Thailand’s government should impose a policy on their foreign direct investment flow and whether they should come out with new strategies to ensure that their currency volatility is stable. We utilized Johansen’s cointegration approach to test the theoretical relations among the variables and follow with other techniques such as Long Run Structural Modelling, Vector Error Correction Method and Variance Decompositions. The findings tend to indicate that exchange rate volatility has significant relation with foreign direct investment while insignificant to exchange rate and gross domestic product. The results suggest that, currency volatility should not be worrisome to the foreign investors since it is the most endogenous and Thailand’s government can intervene in case of excess volatility since their country is under managed float exchange rate which can be manipulated by the Bank of Thailand.

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