The dynamics of foreign direct investment and exchange rates: An interconnection approach in ASEAN

Abstract

This paper examines the direct and spillover effects of exchange rate on foreign direct investment (FDI) inflows in a panel of ASEAN countries from 2001 to 2018. We utilize the spatial econometric approach to accommodate the nature of spatial dependence among ASEAN countries. Our results suggest that the effect of the exchange rate depends on the source-region of FDI, implying the existence of spatial heterogeneity in ASEAN’s FDI. We also show that FDI inflows in ASEAN are not only influenced by the exchange rate of the country itself but also by those of the neighboring countries.

Keywords:

• Foreign direct investment
• exchange rates
• macroeconomics
• spatial models

JEL Classifications:

• F21
• F31
• F41
• R12

PUBLIC INTEREST STATEMENT

This paper investigates the direct and indirect effect of the exchange rate on foreign direct investment inflow. The data used for this research encompass the economies of ASEAN. The investigation of the relationship between exchange rate and foreign direct investment is carried out in a spatial context. The findings suggest that the effect of the exchange rate depends on the source-region of foreign direct investment. We also show that foreign direct investment inflows in ASEAN are not only influenced by the exchange rate of the country itself but also by those of the neighboring countries.

Acknowledgements

I thank my research assistants, Ayu Citra Muthia and Militcyano Samuel Sapulette, for their help in the making of this paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. We do not use the nominal/real effective exchange rate due to incomplete data for Brunei Darussalam, Cambodia, Lao PDR, and Myanmar.

2. The value for the political stability index variable ranges from −2.5 (weak) to 2.5 (strong).

Additional information

Funding

This work was supported by the bank Indonesia;

Notes on contributors

Ferry Syarifuddin

Ferry Syarifuddin is a senior macroeconomic and financial system research specialist at Bank Indonesia. His research activities center on issues of international finance, especially in Southeasts Asia and emerging economies; monetary economics; banks and financial institutions; and Islamic finance. This research is one of his several recent research on financial and economic integration in Southeast Asia.