Impact of the Exchange Rate and Price Volatility on FDI Inflows: Case of Morocco and Turkey

Abstract

This paper aims to examine empirically the impact of price and real exchange rate volatility on Foreign Direct Investment (FDI) inflows. The sample used is based on the Mediterranean countries of Morocco and Turkey for the period 1990-2017. Empirical findings for Morocco revealing that in both short and long-terms, real exchange rate volatility is negative and highly significant. Price volatility depicts a positive effect, which means that greater volatility of inflation may cause greater marginal profitability of capital and hence increase investment. On the other hand, for Turkey, FDI inflows are found more elastic to domestic price fluctuations. The exchange rate volatility, instead, turned out to have a positive but insignificant effect. In addition, we found that the potential market size rate, institution quality, and infrastructure appear to be the key factors in attracting foreign capital in both countries. As for trade openness, a positive effect on FDI flows is only perceptible in Morocco. In addition, the series of structural reforms carried out by Turkish government have generated real benefits for foreign investors by creating the adequate environment. This has allowed Turkey to overcome the problems it was facing in attracting foreign investment during the period analysed.