Information Management in Examining the Role of Inflation and Exchange Rates in Attracting Foreign Direct Investment in Iran (2003-2023)

Abstract



Objective: This study investigates the impact of inflation and exchange rate fluctuations on the attraction of foreign direct investment (FDI) in Iran. Employing the copula modeling approach, it seeks to offer a more nuanced understanding of the complex and nonlinear interrelations between these economic variables and foreign investment in the country. Previous research predominantly focused on linear correlations between inflation, exchange rates, and FDI. However, this study attempts to delve deeper into the intricacies of these relationships by applying copula functions to capture and uncover the potential complexities within these economic interactions, thereby providing a fresh perspective on the dynamics of FDI in Iran.



Methodology: This research utilizes historical data on inflation rates, exchange rates, and foreign direct investment over the period from 2003 to 2023. Data were obtained from reliable domestic and international sources, including economic and statistical databases, and analyzed using the copula method. The copula approach is particularly useful for capturing complex, nonlinear dependencies between variables. Through the application of this method, the study explores the asymmetric and non-linear relationships between inflation, exchange rates, and FDI, providing a richer analysis compared to traditional linear models.



The research incorporates 25 types of copula functions, including Clayton, rotated Joe-Frank, and other variations, to model the intricate dependencies among the variables. These functions allow for a more tailored analysis of how inflation and exchange rate fluctuations individually and jointly influence FDI attraction. Bayesian methods and Markov Chain Monte Carlo (MCMC) simulations were employed to estimate the copula parameters, thus facilitating a robust and sophisticated modeling framework. By utilizing these methods, the study is capable of conducting an in-depth analysis of variable dependencies and deriving more accurate insights into how inflation and exchange rate fluctuations impact the decision-making processes of foreign investors considering Iran as an investment destination.



Findings: The results of the analysis reveal that inflation and exchange rates have a significant, asymmetric, and nonlinear impact on FDI attraction in Iran. Specifically, increased inflation is associated with a substantial decrease in FDI, highlighting the negative influence of inflationary pressures on investment attractiveness. In addition, fluctuations in exchange rates, identified as an economic risk factor, adversely affect the decisions of foreign investors by introducing uncertainty, thus reducing their inclination to invest in Iran. The copula modeling results indicate that the Clayton copula function is most effective in modeling the relationship between inflation and FDI, capturing the nature of dependency between these variables. Conversely, the rotated Joe-Frank copula function proves more appropriate for modeling the connection between exchange rates and FDI, particularly in capturing the risk dynamics imposed by exchange rate variability.



The validity of these findings was confirmed through various evaluation metrics, including maximum likelihood estimation, the Akaike Information Criterion (AIC), and the Root Mean Squared Error (RMSE), all of which underscore the precision and accuracy of the copula functions in the analysis. These criteria collectively support the use of copula models as an effective tool for analyzing the complex and often nonlinear relationships within economic variables and their influence on FDI in Iran.



Conclusion and Recommendations: The findings indicate that both inflation and exchange rate fluctuations exert a substantial and negative effect on FDI attraction in Iran. High inflation, especially when unstable, acts as a significant deterrent, diminishing the country’s investment appeal and posing a barrier to potential foreign investors. Moreover, the volatility of exchange rates creates a high-risk economic environment, which discourages foreign investors from entering the Iranian market due to heightened economic uncertainty. These results highlight that, to foster a more conducive environment for foreign capital, Iranian policymakers should prioritize stabilizing inflation and managing exchange rate volatility effectively. The copula analysis further emphasizes the asymmetric and intricate dependencies among these variables, suggesting that a simple, linear evaluation of these factors may fail to capture the full picture of their impact on FDI.



For future research, it is recommended to focus on shorter time periods with greater granularity and to consider additional variables beyond inflation and exchange rates. Potentially influential factors such as interest rates, political stability, and global economic indices could provide further insights into the dynamics of FDI attraction in Iran. Ultimately, this study recommends that policymakers in Iran take a more proactive approach in controlling inflation rates and managing exchange rate fluctuations to facilitate foreign investment. By creating a stable and predictable economic environment, they can enhance the attractiveness of Iran’s market to foreign investors. These findings offer valuable insights that can assist the government and economic institutions in shaping more appropriate policies to improve the investment climate and develop the essential infrastructure necessary for attracting foreign investments.