Exchange Rates and U.S. Foreign Direct Investment in the Global Processed Food Industry

Abstract

This paper focuses on estimating the effects of the real FDI-weighted exchange rate on real U.S. foreign direct investment (FDI) in the global processed food industry. We use a straightforward production possibility framework as our theoretical basis to demonstrate the shift of production between countries on the basis of exchange rate fluctuations. The log-log regression model, derived from the theoretical model, gives statistically robust results to show that for the years 1983 to 2002, the exchange rate fluctuations, the level of fixed capital in the U.S. food industry, and the cost of materials in both the United States and abroad were major determinants of the stock of U.S. FDI in the global processed food industry. As the dollar appreciated, U.S. FDI increased. An overall conclusion is that countries with an undervalued exchange rate will experience increased FDI. Countries with overvalued exchange rates incur costs from lost export opportunities for domestic firms as well as discourage FDI.

FDI location and exchange rates. is there really a relationship between the two?

“…In contrast, Bolling et al (2007) showed that host countries whose currencies are undervalued received increased FDI inflows whilst countries characterized by overvalued currencies receive low FDI. If the home country's currency gains in value, firms are likely to find themselves recording high profits and having excess capital to invest in other countries, argued Bolling et al (2007).…”

“…If the home country's currency gains in value, firms are likely to find themselves recording high profits and having excess capital to invest in other countries, argued Bolling et al (2007). However, Furceri and Borelli (2008) suggested that the impact of exchange rate volatility on FDI inflows largely depends on the level of trade openness.…”

The interaction between foreign direct Investment and Trade in China's agro-food sector

“…Compared with local enterprises, foreign firms are large in scale and efficient in operation, has a advantage in export. With transnational corporation's entering, China's export in labor-intensive agro-food sectors, such as horticultural and animal products in the eastern and southern regions of China, increases evidently, but China's export in land-intensive agro-food sectors, such as soybeans and grains, doesn't increase in a large scale [6] .…”

Linkage Between foreign Direct Investment, Trade and Trade Policy

“…In their study of FDI in the food industry of the Western Hemisphere, Bolling, Neff and Handy (1998) argue that liberalisation of FDI rules plays a role in the growth of investment. The growth of outward investment generates concerns that outward FDI moves production abroad and substitutes for domestic production and exports.…”

“…The growth of outward investment generates concerns that outward FDI moves production abroad and substitutes for domestic production and exports. However, Bolling, Neff and Handy (1998) suggest that for the US, some data show that the food exports and FDI increase together and are often complementary. Additionally, income and population growth supports the increase in demand for FDI and exports.…”