Exchange Rate Movements and Foreign Direct Investment in Zambia: Evidence from Annual Time-series Data (1990–2024)
Muchemwa Sinkala *
National Institute of Public Administration, School of Business, Lusaka, Zambia.
Chijika Sukumuna
National Institute of Public Administration, School of Business, Lusaka, Zambia.
George Mtayachalo
National Institute of Public Administration, School of Business, Lusaka, Zambia.
*Author to whom correspondence should be addressed.
Abstract
This study examines the relationship between exchange-rate movements and foreign direct investment (FDI) in Zambia using annual time-series data for 1990–2024. Guided by Real Options Theory and Dunning’s Eclectic Paradigm, the analysis applies the Autoregressive Distributed Lag (ARDL) bounds-testing approach to estimate short- and long-run relationships. FDI inflows as a percentage of GDP are modelled as the dependent variable, with the ZMW/US$ exchange rate as the principal explanatory variable and GDP growth and unemployment as controls. The bounds test yields an F-statistic of 7.82, indicating a statistically significant long-run relationship among the variables. In the long run, GDP growth has a positive and statistically significant relationship with FDI (β = 0.819, p = 0.003), whereas the exchange rate and unemployment are statistically insignificant. In the short run, exchange-rate movements (β = 5.176, p = 0.030) and GDP growth (β = 0.462, p < 0.001) are statistically significant, while unemployment remains insignificant. The error-correction term is negative and significant (ECT = −0.690, p < 0.001), implying that approximately 69% of short-run disequilibrium is corrected within one year. Overall, the findings indicate that economic growth is the principal statistically supported long-run factor among the variables included, while exchange-rate movements are relevant to short-run FDI dynamics in Zambia.
Keywords: Foreign direct investment, exchange rate movements, ARDL, economic growth, Zambia