The current trends of financial globalization have provided worldwide investors a great opportunity to invest and increase the financial flows between developed and developing countries through foreign direct investment. Foreign direct investment (FDI) has been viewed by developing countries as a crucial source of economic development and rapid economic growth by transferring advanced technology and management expertise from developed countries to developing countries. After the collapse of Bretton Woods Agreement, the majority of the countries adopted flexible/floating exchange rate systems. Thereafter, uncertainty arose in several countries as a result of the large fluctuations in currency prices. Consequently, exchange rate volatility (ERV) has gained attention from researchers, due to its perceived importance and many studies have investigated the impact of e xchange rate volatility on FDI ; however, there have been long debates and controversies regarding the impact of ERV on FDI. Researchers have argued that to reach better comprehensive results, some determinants that impact FDI have been studied along with ERV. This study employs the basic FDI gravity model as well as the augmented FDI gravity model using the data collected for forty-two source countries over the period 2005-2019. While using a Generalized Method of Moments (GMM) estimation approach, this research intends to provide better understanding of the impact of relative ERV on inward FDI to Egypt as well as investigating the impact of other relative dimensions on inward FDI to Egypt from these source countries. Results have revealed that relative exchange rate volatility has a negative impact on inward FDI to Egypt. It has also been conducted that market size of home countries and host country exert a significant positive impact on inward FDI to Egypt. Geographic distance, bilateral trade, relative cost of borrowing, relative labor productivity, and relative corruption are found to be statistically significant for inward FDI to Egypt.
KeywordsExchange Rate VolatilityForeign Direct InvestmentAugmented Gravity ModelGMM Estimation ApproachDynamic Panel Data Model
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