Impact of exchange rate and exchange rate volatility on foreign direct investment inflow for Mauritius: A dynamic time series approach

Studies focusing on the determinants of foreign direct investment (FDI) inflow to Sub-Saharan African countries remain fairly limited. Such existing research mostly focuses on the level of the exchange rate, often ignoring its volatility. This paper assesses the impact of the real exchange rate and exchange rate volatility on FDI flows for the case of Mauritius, one of the best economic performers on the continent. Using dynamic time series analysis, namely a Vector Error Correction Model, over the period 1976-2018, exchange rate volatility was found to negatively impact FDI while depreciating real exchange attracts foreign investors. The openness level, wages, literacy level and tax are also observed to be ingredients of FDI in both the long and short term. Moreover, the analysis validates the dynamic nature of FDI in Mauritius.