RMB Exchange Rate Volatility and its Impact on FDI in Emerging Market Economies: The Case of Zambia
Arnold Ngowani

Abstract
Foreign Direct Investment (FDI) theories and empirical studies have generated mixed results for the link between exchange rates, their volatilities and FDI. This study argues that large RMB exchange rate volatilities negatively affect inward FDI into Zambia because of the costs inherent in the volatility risks. I use daily exchange rate data from January, 2009 to April, 2011 for statistical manipulation in GARCH (1, 1) model. Estimates show that volatility of the RMB is relatively high and likely to pose greater impact on FDI flow into Zambia. A multiple regression analysis, using Ordinary Least Square (OLS) method, reinforces the findings of a negative correlation between RMB exchange rate fluctuation and FDI into Zambia. I argue that if the RMB appreciates, China’s economic growth slows down due to the fact that Chinese economy greatly depends on exports. A slowdown therefore, negatively affects the flow of FDI from China into Zambia.

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