Factors Affecting Foreign Direct Investment in Iran with Emphasis on Exchange Rate Fluctuations

Foreign direct investment (FDI) is one of the best methods for financing the investment projects. In addition this type of investment is used for other goals، like: technology promotion، development skills and management for enhancing the quality of domestic labor، export market development، increasing domestic production standards، increasing economic growth and improving the welfare of the people and also for moving toward a market economy. The main purpose of this paper is to investigate relationship between uncertainty of real exchange rate and foreign direct investment (FDI) in Iran during the period 1979-2008. To this end، first the index of uncertainty of exchange rate due to real exchange rate fluctuations was estimated using the generalized auto regressive conditional heteroskedasticity (GARCH) model and considered as an proxy variable for uncertainty of real exchange rate. Then the relationship between uncertainty of real exchange rate and FDI was estimated using the auto-regressive distributed lag (ARDL) with Schwartz-Bayesian criterion. The results showed that fluctuations of exchange rates has no effect on FDI. FDI has an inverse relation with inflation، lagged exchange rate and lagged capital stocks and has a direct relation with the index of good governance and human resources. The long run relation for FDI has been confirmed by the results.