Abstract:

Purpose – 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.

Design/methodology/approach – 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 rate.

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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