Green Economics

This study examines the relationship between exchange rate volatility and foreign direct investment (FDI) in G7 countries over the period 2000–2020. Exchange rate fluctuations introduce uncertainty into international financial markets, influencing investors’ decisions and cross-border capital flows. Using panel data econometric techniques, this study evaluates the extent to which exchange rate volatility affects FDI inflows in advanced economies. The empirical results indicate that exchange rate volatility has a negative and statistically significant effect on FDI, suggesting that increased uncertainty discourages foreign investment. These findings support the theoretical framework emphasizing the importance of macroeconomic stability in attracting international capital. From a sustainable economic perspective, the results are particularly relevant, as long-term and sustainability-oriented investments require stable macroeconomic conditions. Exchange rate instability may therefore hinder the flow of sustainable and long-term capital, limiting the potential for stable economic development. The study contributes to the literature by focusing on advanced economies and employing a simplified model that isolates the direct relationship between exchange rate volatility and FDI. The findings provide important policy implications, highlighting the need for stable exchange rate policies to enhance investment attractiveness and support sustainable economic growth.