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Exchange Rate Variability and Foreign Direct Investment: Consequences of EMU Enlargement

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  • MICHAL BRZOZOWSKI

Abstract

This paper analyzes theoretically and empirically the likely impact of the reduction in exchange rate uncertainty, due to European Monetary Union accession, on the intensity of foreign direct investment (FDI) inflow into candidate countries. Theoretical models give an ambiguous picture of how exchange rate uncertainty and volatility affect the direction and magnitude of such inflows. This paper finds that exchange rate uncertainty and volatility--and nominal exchange rate uncertainty in particular--may negatively influence the decision to locate investment in transition and accession countries. Euro adoption, on the other hand, is likely to positively influence FDI inflows in accession countries.

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal Eastern European Economics.

Volume (Year): 44 (2006)
Issue (Month): 1 (February)
Pages: 5-24

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Handle: RePEc:mes:eaeuec:v:44:y:2006:i:1:p:5-24

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=106044

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  1. Darby, Julia, et al, 1999. "The Impact of Exchange Rate Uncertainty on the Level of Investment," Economic Journal, Royal Economic Society, vol. 109(454), pages C55-67, March.
  2. Laura Resmini, 2000. "The Determinants of Foreign Direct Investment in the CEECs: New evidence from sectoral patterns," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(3), pages 665-689, November.
  3. Sung, Hongmo & Lapan, Harvey E, 2000. "Strategic Foreign Direct Investment and Exchange-Rate Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 411-23, May.
  4. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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  6. Alan A. Bevan & Saul Estrin, 2000. "The Determinants of Foreign Direct Investment in Transition Economies," William Davidson Institute Working Papers Series 342, William Davidson Institute at the University of Michigan.
  7. Noorbakhsh, Farhad & Paloni, Alberto & Youssef, Ali, 2001. "Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence," World Development, Elsevier, vol. 29(9), pages 1593-1610, September.
  8. Nada Mora & Ratna Sahay & Jeromin Zettelmeyer & Pietro Garibaldi, 2002. "What Moves Capital to Transition Economies?," IMF Working Papers 02/64, International Monetary Fund.
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  10. Bevan, Alan & Estrin, Saul, 2000. "The Determinants of Foreign Direct Investment in Transition Economies," CEPR Discussion Papers 2638, C.E.P.R. Discussion Papers.
  11. Benassy-Quere, AgnEs & Fontagne, Lionel & LahrEche-Revil, Amina, 2001. "Exchange-Rate Strategies in the Competition for Attracting Foreign Direct Investment," Journal of the Japanese and International Economies, Elsevier, vol. 15(2), pages 178-198, June.
  12. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
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Cited by:
  1. Phillips, Shauna & Ahmadi-Esfahani, Fredoun Z., . "Exchange Rates and Foreign Direct Investment: Theoretical Models and Empirical Evidence," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society.
  2. Gregory Clare & Ira N. Gang, 2009. "Exchange Rate and Political Risks, Again," Departmental Working Papers 200903, Rutgers University, Department of Economics.
  3. Onay, Ceylan, 2006. "A Co-integration Analysis Approach to European Union Integration: The Case of Acceding and Candidate Countries," European Integration online Papers (EIoP), European Community Studies Association Austria (ECSA-A), vol. 10, 09.
  4. Axarloglou, Kostas & Kouvelis, Panos, 2007. "Hysteresis in adjusting the ownership structure of foreign subsidiaries," International Business Review, Elsevier, vol. 16(4), pages 494-506, August.
  5. Arbeláez, Harvey & Ruiz, Isabel, 2013. "Macroeconomic antecedents to U.S. investment in Latin America," Journal of Business Research, Elsevier, vol. 66(3), pages 439-447.
  6. Marek Dabrowski, 2005. "A Strategy for EMU Enlargement," CASE Network Studies and Analyses 0290, CASE-Center for Social and Economic Research.

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