Exchange Rate and Foreign Capital Inflows in Developing Countries

Abstract

Exchange rate is an important factor that influences the foreign capital inflows of any country. Therefore, this study examines the influence of exchange rates on foreign capital inflows in developing countries using a panel dataset from 2000 to 2021. For data analysis, pooled OLS model is applied to the data. The study's outcomes show that real effective exchange rate adversely influences the FDI and foreign aid while positively influencing the remittances. It is suggested that exchange rate stabilization in a country enhances its foreign capital flows, so steps should be taken to keep the exchange rate less volatile. For this purpose, the government should increase exports, improve infrastructure to attract more FDI, and develop policies that attract more investors.