Navigating Risk in West Asia: Asymmetric Impacts of PoliticalInstability and Exchange Rate Volatility on FDI

Abstract

This study examines the asymmetric impact of exchange rate uncertainty and political risk on Foreign Direct Investment (FDI) in 16 West Asian economies (1990-2022). Despite vast natural resources, the region struggles with geopolitical instability, hindering non-resource FDI. We employ a hybrid framework combining Non-linear ARDL (NARDL) decomposition with System Generalized Method of Moments (GMM) to address endogeneity and handle unbalanced panel data resulting from regional conflicts. Exchange rate volatility is modeled using country-specific GARCH(1,1) estimations on Real Effective Exchange Rates (REER). Results confirm a significant “Resource Curse,” where resource rents crowd out other investments. Crucially, we find strong evidence of asymmetry: negative political shocks deter FDI disproportionately more than stability attracts it (hysteresis), whereas exchange rate depreciation paradoxically stimulates efficiency-seeking inflows. These findings, validated by robustness checks, suggest that policy must prioritize political stabilization and leverage competitive exchange rates to diversify West Asian economies.