The purpose of this paper is to investigate how black market exchange premium
affect Foreign Direct Investment. The results of the study will shed light on
whether black markets served to impede or enhance FDI inflows, and hence
whether their disappearance since the 1990s should be of importance to
developing countries keen to attract FDI.
– In studying the effect of the black market premium the author used historical
study for 28 developing countries with high, low and moderate black market
premiums for the years 1982-1993. The author used several models to support his
hypothesis which include econometric model and regression analysis. Data on the
black market exchange rate was obtained from the Pick’s Currency Yearbook for
the years 1983-1988 and from Global Financial Statistics for the years
1989-1993. The premium iscalculated as the percentage difference between the
official exchange rate, obtained from the IMF, and the black market exchange
Findings –Contrary to hypothesis, the results show that the black
market exchange premium does not affect net FDI inflows. The author asserts
that, if this result is in fact accurate, then liberalization of currency
regimes in developing countries, which leads to the disappearance of black
markets, should not be expected to bring in more or less foreign investment,
the reason being that the black market premium did not in the past impede nor
enhance foreign investment.
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