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Exchange Rate Strategies in the Competition for Attracting FDI

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Author Info

  • Benassy-Quere, A.
  • Fontagne, L.
  • Lahreche-Revil, A.

Abstract

Building on the needs for long term capital inflows in developing countries, this paper reconsiders the choice of an exchange-rate regime by integrating the determinants of multinational firms locations. The trade-off between price competitiveness and a stable nominal exchange rate is modeled. It is shown that exchange rate volatility is detrimental to foreign direct investment and that its impact compares with misalignments. The main result is that the building of currency blocks could be a way of increasing FDI to emerging countries as a whole. The frontiers of monetary areas would then be strongly influenced by geography, as FDI is.

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Bibliographic Info

Paper provided by Université Panthéon-Sorbonne (Paris 1) in its series Papiers d'Economie Mathématique et Applications with number 2000.07.

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Length: 25 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:fth:pariem:2000.07

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Postal: France; Universite de Paris I - Pantheon- Sorbonne, 12 Place de Pantheon-75005 Paris, France
Phone: + 33 44 07 81 00
Fax: + 33 1 44 07 83 01
Web page: http://cermsem.univ-paris1.fr/
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Keywords: FOREIGN INVESTMENTS ; EXCHANGE RATE ; MONETARY POLICY;

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References

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  1. S. Lael Brainard, 1993. "An Empirical Assessment of the Proximity-Concentration Tradeoff between Multinational Sales and Trade," NBER Working Papers 4580, National Bureau of Economic Research, Inc.
  2. Linda S. Goldberg & Michael W. Klein, 1997. "Foreign Direct Investment, Trade and Real Exchange Rate Linkages in Developing Countries," NBER Working Papers 6344, National Bureau of Economic Research, Inc.
  3. Jonathan Eaton & Akilo Tamura, 1994. "Bilateralism and Regionalism in Japanese and U.S. Trade and Direct Foreign Investment Patterns," Boston University - Institute for Economic Development 48, Boston University, Institute for Economic Development.
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  5. Luca Antonio Ricci, 1997. "Exchange Rate Regimes and Location," IMF Working Papers 97/69, International Monetary Fund.
  6. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
  7. Michael W. Klein & Eric Rosengren, 1992. "The Real Exchange Rate and Foreign Direct Investment in the United States: Relative Wealth vs. Relative Wage Effects," NBER Working Papers 4192, National Bureau of Economic Research, Inc.
  8. Ronald I. McKinnon & Kenichi Ohno, 1997. "Dollar and Yen: Resolving Economic Conflict between the United States and Japan," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133350, December.
  9. Joseph E. Stiglitz, 1999. "Reforming the Global Economic Architecture: Lessons from Recent Crises," Journal of Finance, American Finance Association, vol. 54(4), pages 1508-1522, 08.
  10. Julia Darby & Andrew Hughes Hallett & Jonathan Ireland & Laura Piscitelli, . "The Impact of Exchange Rate Uncertainty on the Level of Investment," ICMM Discussion Papers 49, Department of Economics University of Strathclyde.
  11. Lionel Fontagné & Michael Freudenberg, 1999. "Endogenous Symmetry of Shocks in a Monetary Union," Open Economies Review, Springer, vol. 10(3), pages 263-287, July.
  12. Robert E. Lipsey, 2000. "The Role of Foreign Direct Investment in International Capital Flows," NBER Working Papers 7094, National Bureau of Economic Research, Inc.
  13. Barrell, Ray & Pain, Nigel, 1998. "Real Exchange Rates, Agglomerations, and Irreversibilities: Macroeconomic Policy and FDI in EMU," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 152-67, Autumn.
  14. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
  15. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
  16. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  17. Takatoshi Ito & Tamim Bayoumi & Peter Isard & Steven A. Symansky, 1996. "Exchange Rate Movements and Their Impact on Trade and Investment in the APEC Region," IMF Occasional Papers 145, International Monetary Fund.
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Citations

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Cited by:
  1. Kawai, Masahiro & Takagi, Shinji, 2000. "Proposed strategy for a regional exchange rate arrangement in post-crisis East Asia," Policy Research Working Paper Series 2503, The World Bank.
  2. Olga Arratibel & Davide Furceri & Reiner Martin & Aleksandra Zdzienicka, 2009. "The Effect of Nominal Exchange Rate Volatility on Real Macroeconomic Performance in the CEE Countries," Working Papers 0934, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  3. Xing, Yuqing & Wan, Guanghua, 2004. "Exchange Rates and Competition for FDI," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  4. Julie Lochard & José de Sousa, 2004. "Investissements directs étrangers et intégration : quels enseignements pour les Peco ?," Économie et Prévision, Programme National Persée, vol. 163(2), pages 87-100.
  5. Jean Pisani-Ferry & Adam Posen, . "The euro at ten: the next global currency?," Books, Bruegel, number 303, September.
  6. Thierry Mayer & Keith Head, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center.
  7. Jennifer Tobin & Susan Rose-Ackerman, 2003. "Foreign Direct Investment and the Business Environment in Developing Countries: the Impact of Bilateral Investment Treaties," William Davidson Institute Working Papers Series 587, William Davidson Institute at the University of Michigan.
  8. Lahcen ACHY & Juliette Milgram, 2005. "Does a free trade area favors an optimum currency area? The Case of Morocco and the European Union," International Trade 0512012, EconWPA.
  9. Isabel Ruiz, 2005. "Exchange Rate as a Determinant of Foreign Direct Investment: Does it Really Matter? Theoretical Aspects, Literature Review and Applied Proposal," International Trade 0511016, EconWPA.
  10. Loïc Cadiou & Julien Genet & Jean-Louis Guérin, 2002. "Evolutions démographiques et marché du travail : des liens complexes parfois contradictoires," Working Papers 2002-16, CEPII research center.
  11. Ottilia Rouguet & Pierre Villa, 2000. "Le passage des retraites de la répartition à la capitalisation obligatoire : des simulations à l'aide s'une maquette calibrée," Working Papers 2000-02, CEPII research center.
  12. Brahim Razgallah, 2004. "La théorie des ZMO s'applique-t-elle aux pays en développement?," International Finance 0403003, EconWPA.
  13. Claudiu T. Albulescu, 2011. "Economic and Financial Integration of CEECs: The Impact of Financial Instability," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 5(1), pages 027-045, March.
  14. PONSOT, Jean-François, 2000. "Le Currency Board : les contraintes de financement et d'ajustement de la convertibilité intégrale," LATEC - Document de travail - Economie (1991-2003) 2000-10, LATEC, Laboratoire d'Analyse et des Techniques EConomiques, CNRS UMR 5118, Université de Bourgogne.
  15. Ayako Saiki, 2005. "Asymmetric Effect of Currency Union for Developing Countries," Open Economies Review, Springer, vol. 16(3), pages 227-247, July.

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