Foreign direct investment and foreign reserves linkage: a global study based on wavelet coherence and granger causality

Abstract

In the contemporary global economy, foreign direct investment (FDI) and foreign reserves (FR) play a crucial role in economic stability, particularly amid geopolitical and financial uncertainties. This study examines the relationship between FR and FDI over a 23-year period (2002–2022), utilising panel data from 110 countries. By employing Wavelet Coherence analysis, the findings indicate that FR significantly influences FDI inflows across most regions, except in Europe, where the relationship is more complex. Additionally, the Granger causality test confirms a predominantly unidirectional linkage from FDI to FR in most countries, particularly in North America, Asia, and Oceania. These findings suggest that policies fostering economic stability, such as flexible tax regimes and strong governance, are essential for enhancing FDI attractiveness, particularly in regions where the FR-FDI relationship remains weak.