Analysing the Effects of Foreign Direct Investments to the Movements of the Philippine Peso Exchange Rate: A Granger Causality Test between Variables

Abstract

The purpose of this paper is to analyze the role of
Philippine exchange rate in explaining the movement of the
Foreign Direct Investments (FDI) in the Philippines. The study
used time series monthly data of the Philippine FDIs and peso
exchange rate from January 2005 to December 2014. Augmented
Dickey Fuller (ADF) test was used in order to test the stationarity
of the data. To examine the heteroscedasticity in the data, the
paper utilized the LaGrange-Multiplier Test of ARCH Test and
Exponential Generalized Autoregressive Conditional
Heteroskedasticity (EGARCH). Finally, the Granger Test for
Causality was used to determine if the foreign direct investments
and exchange rate have long-run dynamic relationship during
the period covered. The results showed that there is no significant
relationship between exchange rate and FDI. The Philippine
exchange rate does not Granger caused the volatility of the
foreign direct investments, and vice versa. This implies that other
Philippine economic variables, excluding FDIs, may influence the
volatility in exchange rate. Also, it can be suggested that the
exchange rate movement does not attract FDIs, thus, authorities
should look at other factors in managing the levels of FDIs and
how it can be increased.