EXCHANGE RATE VOLATILITY AND INWARD FDI: A PANEL DATA ANALYSIS OF BALKAN COUNTRIES

Abstract

This study investigates the relationship between exchange rate volatility and foreign direct investment (FDI) inflows in Balkan countries, a region known for its political instability and significant economic and institutional challenges. Using secondary data from 2011 to 2021, this study employs a fixed-effects model with a dynamic specification to analyze the impact of exchange rate volatility on FDI, alongside other key determinants such as inflation, crude oil prices and corruption perception index. The results indicate that exchange rate volatility negatively impacts the FDI inflows, while crude oil prices are found to have a significant positive effect. The impact of inflation and corruption perception index is found insignificant in explaining FDI inflows, suggesting that these factors do not substantially influence investment decisions in the Balkan region. These findings contribute to the literature on FDI in the Balkans and provide valuable insights for policymakers and investors. The results suggest that reducing exchange rate volatility could improve the investment climate and enhance the region’s attractiveness for foreign investment.