Abstract
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.
Highlights
In ASEAN countries, foreign direct investment (FDI) has been regarded as an important driver that improves a country’s economic performance and international competitiveness due to its positive contribution towards technological spillover, job creation, improved managerial skills and productivity since the mid-1980s
The FDI inflows in all sample countries experienced a significant drop during the periods of the Asian financial crisis (1997-1999) and the global financial crisis (20072009) especially in the case of Malaysia and the Philippines
For the body of knowledge, the study extended the theoretical understanding of the effects of exchange rate movements on FDI inflows by providing evidence that the FDI inflows react differently to increases and decreases in real exchange rate volatility or risk
Summary
In ASEAN countries, foreign direct investment (FDI) has been regarded as an important driver that improves a country’s economic performance and international competitiveness due to its positive contribution towards technological spillover, job creation, improved managerial skills and productivity since the mid-1980s. Had a significant effect on the competition between China and ASEAN-4 (Indonesia, Malaysia, the Philippines, and Thailand) for Japanese FDI movement. Despite the well-established literature on the relationship between exchange rate and FDI, especially in developed countries, it is rare to find studies done in ASEAN countries that examine the impact of exchange rate movements on FDI inflows asymmetrically. Greater exchange rate volatility would discourage FDI inflows into the host country. This current study applies the second moment of the exchange rate movements by examining the asymmetric effect of the exchange rate volatility on FDI. This study extends prior research and contributes to the literature by analyzing whether real FDI reacts differently to real exchange rate risk
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