Exchange rate volatility and FDI response during the financial crisis: empirical evidence from Vietnam

Abstract

This study is to examine the foreign direct investment (FDI) response to real effective exchange rate volatility in Vietnam by using the vector autoregression model. The research data are quarterly frequency data in the period from 2004:Q1 to 2019:Q2. The data on real effective exchange rate were collected from the statistics of Bruegel (Europe) and FDI data were collected from the International Financial Statistics. The quantitative study was conducted with two steps: (1) measuring exchange rate volatility by the GARCH(1,1) method; and (2) examining the impact of exchange rate volatility on FDI in the context of the global financial crisis. The estimation results show that FDI responded significantly to real exchange rate volatility with the lag of 3 periods at the 5% significance level. The FDI response increased after the exchange rate volatility with the lag of 3 periods, and the impact extended to the lag of 6 periods, and then gradually stabilized. The research findings indicate that FDI in Vietnam responds positively and significantly to exchange rate volatility with the lag of 3 periods. Simultaneously, the negative impact of the global financial crisis in 2008 with the lag of 2 periods leads to a slight decrease in FDI inflows into Vietnam.