Exchange rates and foreign direct investment in Uganda

Abstract

It has been argued theoretically that stable exchange rate has positive and significant influence on foreign direct investment hence leading to economic growth. Hypothetically, a stable exchange rate is often considered to be conducive for attracting foreign direct investment (FDI). However, economic theories alone cannot adequately predict the relationship between exchange rate and foreign direct investment. Accordingly, the effect of exchange rate on foreign direct investments remains a controversial issue in empirical literature. This calls for an empirical investigation to measure the effect of exchange rate movements on foreign direct investment. This study examines the relationship between exchange rate and FDI inflows in Uganda using time series data for the period 1990 to 2017. The Fully Modified Ordinary Least Squares (FMOLS) estimation techniques method was used. The study revealed a positively significant relationship between exchange rate movement and foreign direct investment in Uganda over the period. But there is insignificant positive relationship between inflation rate, Gross Domestic Product (GDP) and foreign direct investment inflows in Uganda. It is therefore recommended that effective monetary policies should be pursued by Bank of Uganda to stabilize the exchange rate sustainably. Such policies have the tendency to improve FDI inflows into the country.