How do exchange rates affect foreign direct investment inflows and outflows?

Exchange rates can have a significant impact on foreign direct investment (FDI) inflows and outflows.

When a country's currency depreciates or becomes weaker relative to other currencies, it makes the country's goods and services relatively cheaper for foreign investors. This can lead to an increase in FDI inflows as foreign investors find it more attractive to invest in the country due to the lower costs.

Conversely, when a country's currency appreciates or becomes stronger, it makes the country's goods and services relatively more expensive for foreign investors. This can result in a decrease in FDI inflows as foreign investors may find it less appealing to invest in the country due to the higher costs.

Additionally, exchange rate fluctuations can also impact FDI outflows. If a country's currency depreciates, it becomes more expensive for domestic investors to invest abroad. This may lead to a decrease in FDI outflows as domestic investors find it less favorable to invest in foreign countries due to the higher costs.

On the other hand, if a country's currency appreciates, it becomes cheaper for domestic investors to invest abroad. This can result in an increase in FDI outflows as domestic investors find it more attractive to invest in foreign countries due to the lower costs.

Overall, exchange rates play a crucial role in influencing the attractiveness of a country for foreign direct investment, both in terms of inflows and outflows.