Information Management in Investigating the Role of Inflation and Exchange Rate on Foreign Direct Investment during 2003-2023

Document Type : Original Article

Authors

1 PhD. Student, Department of Economics, Qeshm Branch, Islamic Azad University, Qeshm, Iran

2 Associate Professor, Department of Agricultural Economics, Faculty of Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran

3 Associate Professor, Department of Economics, Faculty of Management and Economics, University of Hormozgan, Bandar Abbas, Iran

4 Assistant Professor, Department of Economics, Faculty of Humanities, Bandar Abbas Branch, Islamic Azad University, Bandar Abbas, Iran

Abstract

Purpose: The present study aims to investigate the impact of inflation and exchange rate fluctuations on the attraction of foreign direct investment (FDI) in Iran, utilizing the Copula modeling approach. This study aims to offer a fresh perspective on the intricate and nonlinear relationship between these economic variables and foreign investment in Iran. This study was conducted using data related to foreign direct investment, inflation rates, and exchange rates during the period from 2003 to 2023.
Method: The data were collected from reliable domestic and international sources and subsequently analyzed using the Copula method, which enables the modeling of complex dependencies between variables. In this context, 25 types of copula functions, including Clayton and Joe-Frank rotational functions, were employed to analyze the dependence among inflation, exchange rates, and foreign direct investment. The parameters of these functions were estimated and evaluated using Bayesian methods and Markov Chain Monte Carlo (MCMC) simulations.
Findings: The results of this study indicate that the relationship between inflation and exchange rates in relation to foreign direct investment (FDI) attraction is asymmetric and nonlinear. Furthermore, an increase in inflation is associated with a significant decrease in foreign investment. Additionally, fluctuations in exchange rates, as an economic risk factor, negatively impact foreign investors' decision-making and have diminished their willingness to invest in Iran. The results of copula modeling indicated that the Clayton function most effectively models the relationship between inflation and foreign direct investment (FDI) attraction, while the Joe-Frank rotational function is more appropriate for analyzing the relationship between exchange rates and FDI. Evaluation criteria include maximum likelihood, the Akaike Information Criterion (AIC), and the minimum root-mean-square error (RMSE), which indicate the accuracy of these functions in modeling the data under investigation.
Conclusion: The results indicate that inflation and the exchange rate have a significant negative impact on attracting foreign direct investment in Iran. High inflation, as a destabilizing factor, diminishes the appeal of investment, while exchange rate fluctuations, viewed as a significant economic risk, pose a barrier to foreign investors' entry. Copula analysis further emphasizes the asymmetric and intricate dependencies among these variables. As a result, Iranian economic policymakers can create a more favorable environment for attracting foreign investment by effectively managing the inflation rate and stabilizing the exchange rate. Future studies should consider shorter time periods and additional factors, such as interest rates and political stability, to gain a more accurate understanding of how these elements influence foreign investment attraction.
 

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References

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Sciences and Techniques of Information Management
Volume 10, Issue 3
November 2024
Pages 241-271

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