The exchange rate between the host and home country is often used to measure the costs of production inputs.
indicated that ceteris paribus an appreciation of the home country’s currency should increase FDI flows as it becomes cheaper to ‘hire’ a given amount of labour in that host country. Thus, an increase in the real exchange rate (a real depreciation of the currency of the host country) is expected to have a positive effect on inward FDI in the host country. A certain number of studies revealed a negative relationship between the exchange rate and inward FDI
Yet, other analyses have illustrated that there is no clear evidence with regard to the long-run relationship
Hypothesis 5. The higher the ratio of the host country’s currency per US$ to the home country’s currency per US$, the higher the level of FDI inflows in the host country from the home country