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Exchange rates and foreign direct investment: a note

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  • Guy V.G. Stevens
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    Abstract

    In "Exchange Rates and Direct Investment: An Imperfect Capital Markets Approach," Kenneth Froot and Jeremy Stein [1991] develop a new finance-based theory to answer an old question--the relationship, if any, between the flow of foreign direct investment and the exchange rate. Their theory, based on the possibility that a foreign firm's borrowing opportunities for financing a U.S. acquisition may be a function of its net worth in dollars, implies a negative relationship between a dollar appreciation and direct investment inflows into the United States. Empirically, the authors find statistically significant evidence of the implied negative relationship for quarterly and annual time series regressions, over the period 1973-88. ; The major purpose of this note is to show that this empirical support for the theory is weak. The authors' regressions show evidence of serious instability, and the significant negative relationship between direct investment inflows and the value of the dollar disappears for important subperiods of the 1973-88 period and for the sample period extended through 1991.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 444.

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    Date of creation: 1993
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    Handle: RePEc:fip:fedgif:444

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    Keywords: Foreign exchange rates ; Investments; Foreign - United States;

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    1. Cushman, David O, 1985. "Real Exchange Rate Risk, Expectations, and the Level of Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 297-308, May.
    2. Catherine L. Mann, 1989. "Determinants of Japanese direct investment in U.S. manufacturing industries," International Finance Discussion Papers 362, Board of Governors of the Federal Reserve System (U.S.).
    3. Kenneth A. Froot & Jeremy C. Stein, 1992. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," NBER Working Papers 2914, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Peter J. Buckley & Jeremy Clegg & Nicolas Forsans & Kevin T. Reilly, 2007. "A Simple and Flexible Dynamic Approach to Foreign Direct Investment Growth: The Canada-United States Relationship in the Context of Free Trade," The World Economy, Wiley Blackwell, vol. 30(2), pages 267-291, 02.
    2. Kueh, Swee-Hui Jerome & Puah, Chin-Hong & Liew, Khim-Sen, 2010. "Selected Macroeconomic Determinants of Foreign Direct Investment Outflow of Singapore," MPRA Paper 25940, University Library of Munich, Germany.
    3. Carlos Rodríguez & Ricardo Bustillo, 2011. "A Critical Revision of the Empirical Literature on Chinese Outward Investment: A New Proposal," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(5), pages 715-733, December.
    4. Peter J. Buckley & Jeremy Clegg & Nicolas Forsans & Kevin T. Reilly, 2004. "A Simple and Flexible Dynamic Approach to Foreign Direct Investment Growth: Did Canada Benefit From the Free Trade Agreements with the United States?," International Finance 0407001, EconWPA.

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