Why Exchange Control Matters in Countries Hosting Foreign Direct Investment?

Abstract

One of the measurements of economic development in a country is the increase in the nation’s level of capital stock. A developing nation may increase the amount of capital stock by incentivizing and encouraging capital inflows, and this is done more commonly through the attraction of foreign direct investments, or FDIs. FDIs are favoured in particular because of their long term durability and commitment to a host countries economy and would be less susceptible to short term changes in market conditions, therefore ensuring a certain level of continuity and stability in the money flow. (Ndedi and Ijeoma, 2008) However, FDI could be impediments to the desired objectives.

In order to assess these impediments, a review of a literature on drawbacks and disadvantages of FDI was undertaken. The findings of this review show that one key impediment of foreign investment consists of allowing foreign companies to transfer most of their profits to their mother countries, which means allowing them absorb the riches that have been newly created in the host country. Here the establishment of foreign exchange controls is needed. In fact, foreign exchange controls are forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by nonresidents. Common foreign exchange controls include among others, restricting currency exchange to government-approved exchangers and restrictions on the amount of currency that may be imported or exported. (Ndedi, 2001).

In order to deal with FDI outflow from the host country, Ren (2014) suggests that special measures like the control of foreign exchange accounts, the control of exchange settlement and conversion, the banks’ obligations of review and registration, and the investigation and sanction need to be implemented. According to her, with this regime of foreign exchange control, China has enhanced foreign exchange liquidity as well as facilitates and speeds up foreign direct investment progress. The paper recommends that companies engaged in FDI must re-invest a certain amount of their profits in the host country; amount that could be discussed with local authorities.

Keywords: Exchange control, Ndedi Alain, FDI