The Impact of Exchange Rate Changes and Volatility on FDI Inflows in Emerging Economies : A comparison of Asia and Latin America

Aura Nisa Sashi Kirana, Bayu Sutikno, S.E.,M.S.M., Ph.D.

2025 | Skripsi | MANAJEMEN

Exchange rate is a key determinant of FDI, yet the relationship with FDI remains complex and context-dependent in emerging economies. This study uses a panel dataset from 2013 to 2023, and a random effects model to analyze how changes in exchange rate, particularly depreciation, and the moderating effect of volatility influence investment decisions. By comparing Asian and Latin American emerging economies , the study finds that depreciation significantly affects FDI Inflows, with a negative effect in both regions. The interaction between depreciation and the region dummy variable is insignificant, showing no regional differences. The moderating effect of exchange rate volatility is also insignificant, suggesting it does not affect the relationship. Other determinants like GDP Per Capita and Inflation Rate have a more significant impact on FDI Inflows. Policymakers and MNEs should focus on these factors, and adopt advanced risk management strategies to prevent negative effects from currency depreciation. Future research should include lagged effects, region-specific factors and different types of FDI.

Exchange rate is a key determinant of FDI, yet the relationship with FDI remains complex and context-dependent in emerging economies. This study uses a panel dataset from 2013 to 2023, and a random effects model to analyze how changes in exchange rate, particularly depreciation, and the moderating effect of volatility influence investment decisions. By comparing Asian and Latin American emerging economies , the study finds that depreciation significantly affects FDI Inflows, with a negative effect in both regions. The interaction between depreciation and the region dummy variable is insignificant, showing no regional differences. The moderating effect of exchange rate volatility is also insignificant, suggesting it does not affect the relationship. Other determinants like GDP Per Capita and Inflation Rate have a more significant impact on FDI Inflows. Policymakers and MNEs should focus on these factors, and adopt advanced risk management strategies to prevent negative effects from currency depreciation. Future research should include lagged effects, region-specific factors and different types of FDI.

Kata Kunci : Keywords : Foreign Direct Investment (FDI), Exchange Rate Depreciation, Exchange Rate Volatility, Asian Emerging Economies, Latin American Emerging Economies.