IMPACT OF EXCHANGE RATE VOLATILITY ON FOREIGN DIRECT INVESTMENT A Case Study of Pakistan

The main objective of this study is to investigate the relationship of Foreign Direct Investment (FDI) with exchange rate and exchange rate volatility. The set of the determinants of FDI can be very large but exchange rate is one of the profound determinants. Nonetheless, exchange rates have become extremely volatile due to its fragility to adapt to the changes in domestic and international financial markets. In this study, time series data have been used for foreign direct investment, exchange rate, exchange rate volatility, trade openness and inflation from 1980-2010 for Pakistan. After collection of data on above stated variables, different time series econometrics techniques (unit root test, volatility analysis, cointegration technique and causality analysis) have been applied for the purpose of analysis. The results squeezed from the study demonstrate that FDI is positively associated with Rupee depreciation and exchange rate volatility deters FDI. Trade openness dramatically increases FDI while the premise doesn’t hold for inflation as it is insignificant. The results of Granger causality test suggested that exchange rate volatility granger causes foreign direct investment but not vice versa.