This paper investigates the relationship between exchange rate uncertainty and the location of US foreign direct investment in Europe. We adopt a mean-variance approach to the standard q theory of investment in order to highlight the impact of exchange rate volatility and exchange rate correlation on investment. A firm concerned with both maximizing profits and minimizing risk would exploit any correlation between exchange rate movements to reduce the variance of its total profit. We estimate US foreign investment in the UK and in Continental Europe in a panel of seven manufacturing industries. Our results show that US firms investing in Europe tend to be risk-averse and decrease their investments as exchange rate volatility rises. Market power does not seem to reduce the effects of exchange rate volatility on FDI. We found strong evidence that the UK is the preferred European location for US investors, since an increase in the correlation between the sterling dollar exchange rate and the euro dollar exchange rate tends to relocate US investment from the Euro Zone to the UK.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number
220.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: