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Foreign Direct Investment And Exchange Rates: A Case Study Of U.S. Fdi In Emerging Market Countries

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  • Manop Udomkerdmongkol
  • Holger Görg
  • Oliver Morrissey
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    Abstract

    This paper investigates the impact of exchange rates on US Foreign Direct Investment (FDI)inflows to a sample of 16 emerging market countries using panel data for the period 1990-2002. Threevariables are used to capture separate exchange rate effects. The nominal bilateral exchange rate tothe $US captures the value of the local currency (a higher value implies a cheaper currency andattracts FDI). Changes in the real effective exchange rate index (REER) proxy for expected changes inthe exchange rate: an increasing (decreasing) REER is interpreted as devaluation (appreciation)being expected, so that FDI is postponed (encouraged). The temporary component of bilateralexchange rates is a proxy for volatility of local currency, which discourages FDI. The results supportthe ‘Chakrabarti and Scholnick’ hypothesis that, ceteris paribus, there is a negative relationshipbetween the expectation of local currency depreciation and FDI inflows. Cheaper local currency(devaluation) attracts FDI while volatile exchange rates discourage FDI.

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    File URL: http://www.nottingham.ac.uk/economics/documents/discussion-papers/06-05.pdf
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    Bibliographic Info

    Paper provided by University of Nottingham, School of Economics in its series Discussion Papers with number 06/05.

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    Handle: RePEc:not:notecp:06/05

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