Effect of exchange rate misalignments on foreign direct investment in Sub-saharan Africa

Kirsi Zongo (), Mahamadou Diarra and M. Idrissa Ouedraogo
Additional contact information
Kirsi Zongo: University Thomas SANKARA
M. Idrissa Ouedraogo: University Aube Nouvelle

SN Business & Economics, 2024, vol. 4, issue 6, 1-21

Abstract: Abstract This paper empirically analyzes the effect of the nature of exchange rate misalignment on FDI in Sub-Saharan Africa (SSA) over the period 1998–2018 using the random effects model and the GMM method in system. The behavioral exchange rate model (BEER) was used to determine the nature of its misalignments. The results showed that the nature of misalignment is an important determinant of FDI in SSA with a symmetric and negative effect between undervaluation and overvaluation of the REER on FDI. Overvaluation of the REER leads to a decline in FDI inflows from SSA countries in the same proportion as the increase in FDI inflows from undervaluation. Thus, FDI inflows to SSA are caused in Granger’s sense by the misalignment of the exchange rate. This causality is bidirectional for countries with flexible exchange rates. To achieve this, it is fundamental for SSA countries to: (i) adopt good management of the exchange rate, particularly undervaluation of the REER, to attract FDI, which is a guarantee of industrial development and economic growth in this zone; (ii) avoid overvaluation of the exchange rate, which represents a tax on exports for firms and a factor that discourages foreign investors.

Keywords: Exchange rate; Foreign direct investment; Sub-saharan africa; E43; F21; O55 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s43546-024-00656-z Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:snbeco:v:4:y:2024:i:6:d:10.1007_s43546-024-00656-z

Ordering information: This journal article can be ordered from
https://www.springer.com/journal/43546

DOI: 10.1007/s43546-024-00656-z

Access Statistics for this article

SN Business & Economics is currently edited by Gino D'Oca

More articles in SN Business & Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().