The impact of exchange rate and exchange rate volatility on Mauritius foreign direct investment: A sector‐wise analysis

Abstract

AbstractThis article analyses the structure of FDI inflow in different sectors of the Mauritian economy. While undertaking this investigation, we primarily allow interaction of FDI with exchange rate and exchange rate volatility and with other equally important macroeconomic variables such as trade openness, human capital, GDP, wages and salaries, gross capital formation, and inclusion of a dummy variable to assess the Mauritian Corporate Income Tax (CIT) reform of 2007. Sectors classified as manufacturing, financial, construction, real estate, tourism, and telecommunication, are considered. Using semi‐annual data spanning from 1990 to 2015, the cointegration bound test reveals a systematic long‐run relationship between the set of variables. This justifies the use of an ARDL model. While exchange rate and exchange rate volatility have negligible impact on FDI inflow in the short run, the ARDL results show that a real depreciation of the Mauritian Rupee against the U.S. dollar over the last decades has been beneficial as it has consistently enhanced FDI inflow in various sectors. Besides, there is evidence that investors in the construction, real estate, and telecommunication sectors, as compared to the financial and manufacturing sectors, are more affected by exchange rate volatility. The ARDL model also suggests that investors are particularly concerned with infrastructure capital, trading opportunity, and human capital, mostly when it comes to labour‐intensive industries such as manufacturing, construction, and tourism. Additionally, the significance of the FDI lag values in the restricted error correction model (ECM) confirms the presence of short‐run dynamism in FDI inflow modelling.