Impact of Foreign Direct Investment FDI and Exchange Rate Fluctuations on Economic Growth in Asian Countries

Abstract

Our research is based on examining the dual impact of exchange rate fluctuations and (FDI) foreign direct investment on economic growth, which was measured through the indicator (annual % growth of GDP ). Our data was across five different Asian countries (Pakistan, India, Nepal, Maldives, and Bangladesh). Our data was taken from the period 1990-2018. We are employing the panel data econometric approach with a fixed-effects model because we ran the Hausman test and our data ( P>0.05). Also, our model's independent variables have fixed characteristics over a period of time so that the fixed-effects model is best for our model. The study analyzes the major macroeconomic variables such as FDI inflows in the country, the real effective exchange rate adjusted by inflation, government expenditure (infrastructure, education, etc.), trade industrial growth, inflation measured by CPI, and the real interest rate adjusted by inflation. We take all independent variables to examine the effect of these on the economic growth of Asian countries. Our findings indicate FDI and exchange rates have a significant positive influence on GDP, suggesting that policymaking and governance have a positive impact on FDI inflows, while on the other hand, stabilizing currency is an important factor in enhancing the sustained economy. Conversely, inflation, which was measured by CPI data and the real effective interest rate, has a negative impact on the economy because inflation decreases the purchasing power of individuals, and higher interest rates increase the cost of borrowing money. So it highlights the barriers to investing and growing in these economies. The study also indicates that government spending and trade openness have a positive influence on GDP. This research contributes to a broader scale and helps to fulfill the empirical gap regarding the impact of foreign direct investment and exchange rate volatility on economic growth. It offers both policy guidance and insights for government and foreign investors.