Exchange rate volatility and its effect on foreign direct investment inflows in sub-Saharan African region

The perturbation and volatility of exchange rate has been a challenging factor in attracting foreign direct investment (FDI) to African countries particularly those that lie within the Sub-Sahara African (SSA) region. This has necessitated the study which aimed to empirically examine how the fluctuations in exchange rate have impacted on the inflow of FDI to SSA. Data from 14 selected SSA countries covering the period between 1996 and 2022 were used. The panel regression analysis that involve the pooled regression, fixed effect and random effect models and panel cointegration were employed as the basic econometrics approach. The findings from the pooled regression, fixed effect model and the parsimonious Error Corrections Model (ECM) indicated that real exchange rate volatility (REXRV) had a negative and significant relationship with the FDI, implying that the volatility of the exchange rate had detrimental effect on FDI inflow. While real exchange rate (REXR) had a positive and significant impact on the level of FDI inflow, thus suggesting an improved FDI inflow due to depreciation of currency. Similarly, Gross Domestic Product (GDP) and trade openness (TOP) have a positive and significant impact on FDI. On the contrary, the interest rate had a negative and significant impact on the flow of FDI. The rate of inflation (ROI) also has a negative but insignificant impact on FDI. The statistical significance of the ECM indicates a satisfactory speed of adjustment correcting the significant errors in each period. Therefore, we recommend improved productivity of export goods and guided foreign exchange rate deregulation in order to stabilize the exchange rate and consequently enhance. Keywords: Exchange Rate Volatility, Foreign Direct Investment Inflow, Panel Data Regression, Sub-Saharan Africa, Growth.