The Effect of Real Exchange Rate Volatility Regimes on Foreign Direct Investment in Iran (Markov Switching Non-Linear Approach)

The investigation of relationship between real exchange rate volatility regime and FDI is one of the main issues in macroeconomics and has been considered empirically in recent years. Economic activity in the world and in every moment of life is faced with a variety of risks and uncertainty. Through of the uncertainty, it can be noted that the phenomenon of real exchange rate risk. This study intends to investigate the impact of real exchange rate fluctuations on foreign direct investment with annual data and during the 1974-2016, by using a Markov switching on Iran deal. The results suggest that, real GDP as an indicator of the size of economy and trade openness have a positive and significant effect, real exchange rate has a positive impact on foreign direct investment in Iran. On the other hand, Risk indicators in the country in both medium- and low-risk diet has a negative impact on foreign direct investment. Both effects are somewhat alike. This result is indicative of the fact that Iran's economy can clearly be seen as a source of financing, targets stable economic. In order to attract foreign direct investment only legislation and the creation of free trade zones is not enough. And decreasing country risk and the improvement in the overall economic, political as well as the political environment for big investors in the country is essential to achieve this.