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Exchange rate uncertainty and foreign direct investment in Africa: Does financial development matter?

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  • Michael Effah Asamoah
  • Imhotep Paul Alagidede
  • Frank Adu

Abstract

The orthodox view is that uncertainty deters investments and, by extension, private capital inflows. Paying specific attention to the volatility of the domestic exchange rate, foreign direct investment (FDI), and financial development indicators, this study investigates the impact of exchange rate uncertainty on FDI and whether financial development matters in such association. We establish our empirical relationship with a system general methods of moments (GMM) two‐step robust estimator with orthogonal deviations. We found evidence supporting a nonlinear U‐shaped relationship between uncertainty and FDI and that the impact of uncertainty on FDI depends on varying levels of uncertainty. We also document that uncertainty deters FDI flows and that countries with a well‐functioning financial development can transform the adverse impact of volatility on FDI. However, curbing the adverse effect depends on the specific indicator and the threshold value of financial development (financial institutions or financial markets).

Suggested Citation

  • Michael Effah Asamoah & Imhotep Paul Alagidede & Frank Adu, 2022. "Exchange rate uncertainty and foreign direct investment in Africa: Does financial development matter?," Review of Development Economics, Wiley Blackwell, vol. 26(2), pages 878-898, May.
    • Handle: RePEc:bla:rdevec:v:26:y:2022:i:2:p:878-898
    DOI: 10.1111/rode.12858
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    Cited by:

    1. Michael Effah Asamoah & Imhotep Paul Alagidede & Frank Adu, 2022. "On the allocation puzzle and capital flows: Evidence from foreign direct investment and real sector growth in Africa," African Development Review, African Development Bank, vol. 34(3), pages 370-380, September.
    2. Rexford Abaidoo & Elvis Kwame Agyapong, 2025. "Macroeconomic shocks, regulatory uncertainty, and the drive towards financial inclusiveness in emerging economies," International Economics and Economic Policy, Springer, vol. 22(1), pages 1-22, February.
    3. Kirsi Zongo & Mahamadou Diarra & M. Idrissa Ouedraogo, 2024. "Effect of exchange rate misalignments on foreign direct investment in Sub-saharan Africa," SN Business & Economics, Springer, vol. 4(6), pages 1-21, June.

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