Exchange Rate Movements and Foreign Direct Investment in Zambia: Evidence from Annual Time-series Data (1990–2024)

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.