Exchange Rates and Foreign Direct Investment:  An Imperfect Capital Markets Approach

Froot, Kenneth A.; Stein, Jeremy C.

doi:10.3386/w2914

Cited by 390 publications

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“…The former tend to find a negative correlation, so that a depreciation of the domestic currency encourages FDI inflows. Froot and Stein (1991) rationalize this using an imperfect financial markets approach: in presence of credit constraints personal wealth matters and thus exchange rate levels affect relative wealth position between domestic and foreign agents. Hence devaluations can lead to a surge of foreign acquisitions.…”

Section: Literature Reviewmentioning

confidence: 99%

Common currencies and FDI flows

Schiavo¹

2007

Oxford Economic Papers

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The paper investigates the impact of EMU on foreign direct investment flows. Using the option value approach to investment decisions, it is possible to show how exchange rate uncertainty hinders cross-border investment flows. By permanently fixing bilateral exchange rates, a currency union can then be expected to spur international investment. Results from a gravity model on a sample of OECD countries confirm the hypothesis that currency unions have a positive impact on FDI; moreover, adopting the same currency appears to do more than merely eliminating exchange rate volatility. These findings closely resemble those recently obtained in the trade literature. JEL Codes: F15, F21. Terms of use: Documents in EconStor may

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Section: Literature Reviewmentioning

confidence: 99%

Common currencies and FDI flows

Schiavo¹

2007

Oxford Economic Papers

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“…Froot and Stein 1991;Razin, Sadka and Yuen 1998;Klein, Peek and Rosengren 2002;Portes and Rey 2005;Goldstein and Razin 2005). Much of the literature (e.g.…”

Section: Introductionmentioning

confidence: 99%

“…Much of the literature (e.g. Froot and Stein 1991) argues that FDI should be more information intensive than other types of capital because it implies also a transfer of ownership and management responsibilities. By contrast, other papers claim that it is portfolio equity and to a certain extent also debt that should be more sensitive to information frictions rather than FDI or bank loans due to a lack of ownership control of the former (e.g.…”

Section: Introductionmentioning

confidence: 99%

The pecking order of cross-border investment

Daude

Fratzscher

2008

Journal of International Economics

226

171

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“…These include the growth rate of the regional economy for the year of the initial investment and the sterling exchange rate relative to the plant's source country. In the face of market imperfections, Froot and Stein (1991) find that FDI varies with the exchange rate, such that an appreciation in sterling may make re-investment cheaper in the UK, but make repatriated profits more expensive, adversely affecting survival. The annualized exchange rate for 2 and 5 years after the date of the initial investment were used, of which the latter is better performing.…”

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confidence: 99%

Re-investment and the survival of foreign-owned plants

Wren¹,

Jones²

2009

Regional Science and Urban Economics

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Foreign-owned plants have higher conditional exit rates, but this paper tests the hypothesis that re-investment "embeds" these plants, leading to significantly longer survival time durations. A unique dataset is used for 265 plants that commenced in foreign ownership after 1985 in North East England, distinguishing between start-up ("greenfield") and acquisition plants. Survival is measured at 2000, and the paper analyses the duration to the first reinvestment and survival, allowing for selection into the multiple investment state. It finds that re-investment increases the lifetime of start-up plants, but this is insignificant once selection is controlled for, while for acquisition plants there is no difference. Grants affect selection, but not the survival of start-up plants. The paper offers little support for re-investment as a source of "embeddedness".JEL classification: O12, L20, R58

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Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach

Cited by 390 publications

References 0 publications

Common currencies and FDI flows

Common currencies and FDI flows

The pecking order of cross-border investment

Re-investment and the survival of foreign-owned plants

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