The Impact of Exchange Rate Volatility on Foreign Direct Investment in Iran

The flows of foreign investment are the fundamental elements in the economical evolution of countries within the globalization process of economy. Previous research on exchange rate shows its significance as a key role in trades and flows of FDI. Although exchange rate and FDI are empirically investigated but the relationship between the volatility of exchange rate and flows of international investments is generally not identified. Therefore, considering the importance of the subject discussed, it is needed to consider the determinants of FDI specially the volatility of exchange rate and provide better situations for attracting FDI in Iran.The main goal of this study is evaluating the determinants of inward FDI particularly volatility of exchange rate in Iran by using the Johansen and Juselius's cointegration system approach model covering the period 1980Q2-2006Q3. The findings of this study reveal that gross domestic product, openness and exchange rate to have positive relationship with foreign direct investment but, world crude oil prices and volatility of exchange rate have negative relationship with foreign direct investment. The empirical results obtained in this paper recommend the economy Politicians in Iran to implement exchange rate policies that promote stability of exchange rate, which could help reduce exchange rate volatility in order to attract more FDI.