Exchange Rate Regimes and Foreign Direct Investment Flow in West African Monetary Zone (WAMZ)

Abstract

This study examines the effect of exchange rate regimes on foreign direct investment (FDI) flow for West African Monetary Zone (WAMZ). The Arellano Panel Correction for Serial Correlation and Heteroskedaticity option of the Within Estimator for fixed-effect panel data model as well as the Dynamic Panel Data Instrumental Variable Approach by Anderson and Hsiao [(1981). Estimation of dynamic models with error components. Journal of the American Statistical Association, 76, 598–606] for the countries selected based on the data availability for the period 1980–2016 were used. The fixed exchange rate regime was found to hamper FDI flow in the zone, while intermediate policy had a significantly positive effect in facilitating FDI flow during periods of declining foreign reserves and narrowing current account balance in WAMZ. This implies that the transmission of the effect of exchange rate regimes on FDI inflows depends on the positions of the foreign reserves and current account balance in the zone. The study therefore recommends the need for monetary authorities to be cautious in managing their exchange rates especially in periods of depleting foreign reserves and narrowing current account so as not to deter the much needed FDI inflow.

KEYWORDS:

• Exchange rate regimes
• inflationary expectation
• exchange rate uncertainty
• foreign direct investment flow
• panel data analysis

JEL CLASSIFICATIONS:

• E310
• F210
• F310

Acknowledgement

The author acknowledges the immense support from the African Economic Research Consortium (AERC) and the African Development Bank (AfDB) for the financial support and opportunity as a Visiting Research Scholar to the African Development Bank Research Department that culminated into this study. The earlier version is available as the AfDB Working paper No. 254. The author is also grateful to the comments received from the International Economic Journal’s reviewers. Please note that the usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 For details about the OLI framework and other groupings, see also Anyanwu & Yameogo (2015).

2 Busse et al. (2010) considered source and host country characteristics which in this case is not considered because the FDI flow is not bilateral flows.

3 Institutional variable included here is due to the data coverage as other measures have shorter time series.

4 There are other methods like the Survey Method and the Market-Based Method which are not used due to data limitations in these countries especially with the market-based method.

5 Details on the theoretical discussion of the differences on the effects of volatility and uncertainty measures on FDI (see Brzozowski, 2006).

6 Based on the International Monetary Fund (2012, 2014) classifications and reports, the fixed and intermediate policy regimes are the most common in these countries, hence this study considered only these two (see also Abbott et al., 2012).

7 The result is not presented since it is of no use to proceed for cointegration test and also to conserve space.

8 The result of the Ramsey Test is not presented here since the Pooled OLS was dropped and since the F-test (2) also confirmed its rejection.

Additional information

Funding

This work was supported by African Economic Research Consortium and African Development Bank [grant number AERC/AfDB 2016].

Notes on contributors

Perekunah B. Eregha

Perekunah B. Eregha is a Professor of Macroeconomics at the School of Management and Social Sciences, Pan-Atlantic University, Lekki-Lagos. Perekunah Bright Eregha holds a Doctorate Degree in Economics from the collaboration of African Economic Research Consortium (AERC) and University of Benin, Benin City, Nigeria. He has also undergone courses & training in DSGE modeling in University of Surrey, Guildford, London, UK and Panel Data Analysis by the AERC in Tanzania. Prior to joining Pan-Atlantic University, he was a Senior Research Economist at the Research Department of the Nigerian Deposit Insurance Corporation (NDIC), Abuja and was also a Senior Lecturer at the Department of Economics, University of Lagos. His research areas are Macroeconomic Policy Analysis, International Finance and Economic Modeling. Prof. Eregha was among the five consultants that built the Nigerian Economic Summit Group (NESG) Medium Term Macroeconometric Model on Nigerian Economy. He was a Visiting Research Fellow in the Macroeconomics Policy, Forecasting and Research Department of the African Development Bank, Cote D’voire.