Higher interest rates attract foreign investors by offering greater returns on fixed-income assets
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Multiple economic studies and academic literature confirm that higher interest rates attract foreign capital and investment by offering greater returns on fixed-income and related assets.
Determinants of Foreign Direct Investment (FDI) in Australia were analyzed from 1986 to 2011, based on data availability. The determinants considered FDI inflows according to aggregate FDI inflows and FDI inflows by the top three source countries (USA, UK and Japan). Empirical studies identified four results. (1) For the determinants of FDI in Australia, a larger market size will attract more FDI, whereas more openness and a higher corporate tax rate will discourage FDI inflows into Australia. Lower customs duty and lower interest and depreciation of exchange rates will attract more FDI. The relationship between FDI inflows into Australia and wages was not significant. (2) For the determinants of US inward FDI in Australia, a larger market size will attract more US inward FDI in Australia, whereas more openness and an appreciation of the exchange rate will discourage US inward FDI in Australia. A negative and significant relationship was obtained between customs duty and US inward FDI in Australia. There were positive and significant relationships between US inward FDI in Australia and both the interest and corporate tax rates. (3) For the determinants of UK inward FDI in Australia, greater research and development in Australia will attract more UK inward FDI in Australia, whereas a higher corporate tax rate will discourage UK inward FDI in Australia. The positive relationship between market size and UK inward FDI in Australia was not significant. Openness, customs duty and i
Sustaining inclusive economic development in developing countries involves stable macroeconomic environments capable of attracting long term foreign investment and supporting entrepreneurship driven growth. In addition, capital inflow, foreign direct investment contributes to the development of entrepreneurship ecosystems through technological knowledge transfer, innovation diffusion, management expertise and enhanced opportunities for small and medium enterprises (SME’s) and sustainable businesses enterprises. This study examines the determinants of Foreign Direct Investment (FDI) inflows in Russia, India, and China (RIC) using annual panel data covering the period from 2001 to 2024. The Pooled Mean Group Autoregressive Distributed Lag (PMG-ARDL) approach to estimate both short-term dynamics and long-term equilibrium among the selected countries. Panel unit root test is applied to determine the order of integration of the variables and assess the suitability of the PMG-ARDL framework. The results indicate the long-term relationship exists between FDI inflows and macroeconomic variables. In particular, market size emerges as a significant determinant of FDI, highlighting the importance of sustained economic growth and growing market opportunities in attracting foreign investment. The findings highlight the importance of sustained economic growth along with increasing domestic markets for attracting foreign direct investment inflows. On the other hand, higher real interest rat
Capital chases higher returns, and African countries continuously strive to implement effective policies to attract more Foreign Direct Investments (FDI). Against this backdrop, we explore the relationship between interest rates and FDI inflows in Africa and how exchange rates and unemployment distinctively affect that relationship. We employ panel data on six major FDI-hub economies in Africa for the period 1990-2017. The results of the study suggest that interest rates have a statistically significant positive impact on FDI inflows. Also, the results indicate that when exchange rates interact with interest rates the effect of the latter on FDI is less positive especially in economies where exchange rates are high. On the other hand, when unemployment interacts with interest rates the impact of the latter on FDI is more positive. We conclude that policies thatstabilize exchange rate and increase labor development should be fortified if an African economy wants to achieve and sustain long term inflows of FDI.
Even in a floating foreign exchange rate regime monetary authorities sometimes intervene in the currency market due to liquidity demand and foreign exchange crisis. Typically, central banks intervene using foreign currency trades and/or changing domestic interest rates. We discuss this framework in the context of an optimal impulse stochastic control model. The control and the performance equations consider interventions with swap operations in the domestic market since Central Bank of Brazil also use these operations. We evaluate risk management strategies for central bank interventions in case of crisis based on the model. We conclude that the Brazilian risk management strategy of increasing international reserves holdings and decreasing foreign exchange rate short exposure on public domestic debt after 2004 gave more flexibility to the country to manage foreign exchange rate risk in 2008 and to avoid higher interest rates to attract international capital as it was necessary in previous crises.
Significance The budget envisages an overall deficit of 7% of GDP, revised upwards from an earlier draft because of the effects of devaluation and higher interest rates on public debt servicing costs. The government is aiming for a primary surplus (excluding interest payments) of 2.5% of GDP. This is based on increases in revenue from taxation and other sources. Impacts Investor confidence in government debt will depend on maintaining a flexible exchange rate and offering premium interest rates . The 2.5% of GDP primary surplus target will help bring down public debt over the medium term. Cairo will likely shape its foreign policy to help attract investments and support economic objectives.
Even in a floating foreign exchange rate regime, monetary authorities sometimes intervene in the currency market due to liquidity demand and foreign exchange crises. Typically, central banks intervene using foreign currency trades and/or by changing domestic interest rates. We discuss this framework in the context of an optimal impulse stochastic control model. The control and performance equations include interventions with swap operations in the domestic market, since the Central Bank of Brazil also uses these operations. We evaluate risk management strategies for central bank interventions in case of crisis based on the model. We conclude that the Brazilian risk management strategy of increasing holdings of international reserves and decreasing short foreign exchange rate exposure in domestic public debt after 2004 gave the country more flexibility to manage foreign exchange rate risk in 2008 and to avoid higher interest rates to attract international capital as was necessary in previous crises.
Most models of financial markets, trade and business cycles start from an assumed state of equilibrium and then describe how the economy becomes increasingly unbalanced and stressed. Prices rise as full employment and full capacity are approached. The trade balance falls into deficit as raw materials and import prices rise. Interest rates also rise as business upswings heat up. Higher interest rates attract foreign loan inflows to stabilise the balance of payments, but this builds up foreign indebtedness, whose carrying charges are met by yet new borrowing.
This study evaluates exchange rate dynamics between the Naira and global currencies, utilizing weekly data from 2008 to 2024. The exchange rates, NGN/USD, NGN/CAD, NGN/AUD, NGN/EUR, and NGN/JPY were analyzed to explore the impact of macroeconomic determinants such as interest rate differentials, market volatility, and inflation rate differentials on exchange rates. The study employed ARIMA regression, and the wavelength techniques. The results climax the nuanced interplay between global financial flows and local economic conditions in determining exchange rates of the Naira against global currencies. The result on inflation differential aligns with the purchasing power parity (PPP) theory, which suggests that currencies adjust to offset inflation disparities. The market volatility result partly implies that periods of heightened market turbulence tend to favor the EUR, driving up the demand for the Euro and subsequently appreciating its value against the Naira. This finding aligns with traditional financial theories that associate risk-aversion behavior with movements towards stronger, less volatile currencies during times of market stress. The results of the study validate the interest rate parity theory, which posits that higher interest rates in one country attract foreign capital, influencing exchange rate dynamics. The detail level estimates of the decomposition component of wavelet results underscore the relevance of micro-level factors and short-lived fluctuations that
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