THE IMPACT OF THE EXCHANGE RATE AND ITS VOLATILITY ON FOREIGN DIRECT INVESTMENT IN SUB-SAHARAN AFRICA

This paper examines the relationship between foreign direct investment (FDI) and exchange rates for low-income countries of sub-Saharan Africa, using a panel data approach and two-Stage Least Squares (2SLS) method. The result shows that depreciation of the real exchange rate attracts more FDI to sub-Saharan African countries, while an increase in real exchange rate volatility discourages FDI flows to these countries. The U.S. dollar peg system is not an attractive exchange rate regime for foreign investors in sub-Saharan African countries because of exchange rate volatility. The novelty of this study rest on the fact that, the use of different periods to measure the exchange rate volatility gives a plausible support to the conclusion that relative price has magnificent influence on FDI inflows