The Impact of Misalignment on FDI in the Developing Countries

Year 2014, Volume: 4 Issue: 4, 784 - 800, 01.12.2014

Abdessalem Gouidar Ridha Nouira

Abstract

This paper contributes to a current and intense debate among economists concerning the impact that real exchange rate misalignment can have on FDI. To identify the degree of misalignment, a model of Edwards in Panel will be estimated for a sample of 52 developing countries over the period 1980-2010. Once the misalignment values ​​are determined, they will be included in the FDI model. The results prove that the misalignment is a main determinant of the FDI in the developing countries. Indeed, the overvaluation has a negative and significant effect on the FDI while undervaluation does not have a significant effect on it. Finally, a persistent overvaluation in developing countries can slow down the flow of FDI to these countries, whereas the persistent undervaluation stimulates these flows.

Keywords

Foreign direct investment, Overvaluation, Undervaluation