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Exchange Rate Volatility and Foreign Direct Investment in Selected West African Countries

This paper empirically investigates the exchange rate volatility-FDI nexus in selected Economic Community of West African Sates (ECOWAS) countries using time series data from 1986-2017. Using Autoregressive Distributed Lag (ARDL) model and Toda-Yamamoto (1995) causality techniques, the effects of exchange rate volatility on FDI and causality relationship between the two are examined. The empirical results show that the estimated coefficient of nominal exchange rate volatility is negative in all the selected countries but significant only in Ghana, Sierra Leone, and Nigeria. Conversely, the effect of real exchange rate volatility is negatively significant as expected, in Nigeria, Togo, Sierra Leone, and Cote d’lvore. However, the effect is positive but statistically insignificant in Ghana and Gambia. Furthermore, the causality test results show unidirectional causality from exchange rate volatility to FDI in all selected countries except in Ghana when the nominal exchange rate is employed. On the other hand, when real exchange rate volatility is employed, there is evidence of bidirectional causality between the two variables only in Nigeria and Sierra Leone.