Untying The Gordian Knot: The Multiple Links Between Exchange Rates and Foreign Direct Investment

Abstract

Theoretical and empirical studies show that the level and volatility of exchange rates can have significant effects on foreign direct investment (FDI). But the evidence is ambiguous, with the impact of exchange rates being heterogeneous across countries and types of investment, and varying over time. Fixed exchange rate regimes may stimulate investment, but largely because of their indirect benefits for the investment climate rather than because of lower currency volatility, especially in larger economies. Careful judgements still need to be made about the appropriate entry rate, since real exchange rate levels can have a long-lasting impact on the spatial distribution of economic activities and living standards. Copyright (c) Blackwell Publishing Ltd 2003.

Real exchange-rate uncertainty and US foreign direct investment: an empirical analysis

“…A positive impact of exchange-rate uncertainty on FDI is presented in studies by Cushman (1985Cushman ( , 1988, Goldberg andKolstad (1995), de Meńil (1999) as well as Pain and van Welsum (2003), among others. Studies reporting a negative correlation come from Campa (1993), Bénassy-Quéré et al (2001), Urata and Kawai (2000), and Kiyota and Urata (2004) to name a few.…”

The Explanatory Variables of Outward Foreign Direct Investment: Panel Evidence

“…Cushman (1985;1988); Goldberg and Kolstag (1995);De Menil (1997) and Pain and Welsum (2003) argue that exchange rate volatility is associated with higher FDI activity, because foreign investors relocate production activities to avoid transaction risks or to take advantage of price differences to lower cost economies. In contrast, Goldberg (1993); Campa and Golberg (1995); Benassy-Ouere et al (2001); Urata and Kawai (2000); Kiyota and Urata (2004) and Brzozowski (2006) argue that exchange rate volatility reduces FDI flows due to the transaction risks and the consequent reduced investments activity.…”

The Effect of Exchange Rate Risk on U.S. Foreign Direct Investment: An Empirical Analysis

“…An interpretation of estimation results focus ing on industry specifics will be presented in Section 3 of this paper. FDI flows are measured as percentage of the receiving country's GDP which follows a com mon specification already used by Klein and Rosengren (1994), Stevens (1998), Pain and van Welsum (2003) and Kiyota and Urata (2004) for example.…”

“…Positive empirical findings for the impact of exchange rate uncertainty on FDI are presented in studies by Cush man (1985,1988), Goldberg andKolstad (1995), de Meńil (1999) as well as Pain and van Welsum (2003), among others. Studies reporting a negative correlation between exchange risk and FDI come from Campa (1993), Bénassy-Quéré et al (2001), Urata and Kawai (2000), and Kiyota and Urata (2004) to name a few.…”

“…Klein and Rosengren (1994) and Ito (2000) also obtain a positive effect of a dollar de preciation on U.S. FDI inflows. However, a number of studies, including Pain and van Welsum (2003) and Stevens (1998), are not able to identify a statistically sig nificant effect of host-country currency valuation on FDI.…”