Interactive Effects Between Trade Openness and Exchange Rate Volatility on Foreign Direct Investment

Abstract

The study employed a panel data model covering 99 countries to study the interactive effects of trade openness and exchange rate volatility on FDI over the period from 2008 to 2020. The countries in the observed sample were categorized by income. For checking the robustness of the statistical inferences, the random effects model (REM), the fixed effects model (FEM) and the general least squares model (GLS) were synchronously utilized. The results of the study found statistical evidence that the interaction effect increased the negative impact of exchange rate volatility and weakened the positive effect of trade openness in lower middle-income countries. In both the upper middle-income countries and the high-income countries, the interaction effect increased the positive effect of trade openness on FDI. Moreover, the negative effect of exchange rate volatility in high-income countries also showed that it could be eliminated and reversed if the countries continue to maintain a high level of trade openness.