Heterogeneous Impacts of Exchange Rate Volatility on Sectorial Foreign Direct Investment: Hedging, Scale and Policy

Abstract

This is a detailed study that empirically examines the non-homogeneous effects of exchange rate volatility on inflows of foreign direct investment in
manufacturing, services, and technology sectors on the basis of sectorial variations, moderating variables, and market size effects with the ARDL unrestricted error correction model estimated with interaction terms. The quantitative results indicate that manufacturing investments are harshly affected by the uncontrolled base effects of currency fluctuations, but that the friction can be efficiently mitigated by the implementation of the advanced financial derivatives in the huge domestic markets by multinational firms. In contrast, the services industry is shown to be moderately sensitive to fluctuating repatriation rates but proactively uses the sheer size of domestic consumer buying power to hedge itself against external macroeconomic shocks organically. Unlike the rest of the industrial sector, which is entirely on the other side of the classic industrial premise, the technology industry is characterized by an almost complete
structural inertia to localized financial turbulence, and through its innate borderless and global-diversified online revenue base. The marginal effects analysis below conclusively demonstrates that all-purpose macroeconomic policies are not optimal in attracting capital in the world since each industry reacts differently to financial risks. The results indicate that exchange rate volatility is a major deterrent to FDI, but this effect differs by sector and is alleviated by good active exchange rate management policy intervention, corporate hedging strategies and market size. The marginal effects analysis affirms the fact that uniform monetary policies are flawed in their nature. The study asserts that governments ought to forego homogenous monetary stabilization undertakings in favor of creating highly individualized, industry-specific settings, which would meet the exact structural susceptibility as well as technological needs of specific global capitalists. The governments are advised to stabilize production by the use of advanced financial derivative markets, anchor services by the growth of domestic consumption, and entice borderless digital capital by the aid of advanced technological infrastructure.