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

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  • Michal Brzozowski

Abstract

The aim of the paper is to analyze theoretically and empirically the likely impact of the reduction in exchange rate uncertainty, due to the EMU accession, on the intensity of FDI inflow into candidate countries. Theoretical models give an ambiguous picture of how exchange rate uncertainty and volatility affect direction and magnitude of FDI inflows. The main contribution of this paper is in finding that exchange rate uncertainty and volatility may negatively influence the decision to locate investment in transition and accession countries. Nominal exchange rate uncertainty seems to particularly hamper FDI inflows in accession countries. The key finding of this paper is that euro adoption is likely to exert a positive influence on FDI inflows in accession countries.

Suggested Citation

  • Michal Brzozowski, 2003. "Exchange Rate Variability and Foreign Direct Investment - Consequences of EMU Enlargement," CASE Network Studies and Analyses 0258, CASE-Center for Social and Economic Research.
    • Handle: RePEc:sec:cnstan:0258
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    Cited by:

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    2. Masahiro Tokunaga & Ichiro Iwasaki, 2017. "The Determinants of Foreign Direct Investment in Transition Economies: A Meta-analysis," The World Economy, Wiley Blackwell, vol. 40(12), pages 2771-2831, December.
    3. Warren Moraghen & Boopen Seetanah & Noor Sookia, 2019. "Explaining Heterogeneity in the Effect of the Exchange Rate and Exchange Rate Volatility on Foreign Direct Investment: A Meta‐Analysis Approach," African Development Review, African Development Bank, vol. 31(3), pages 275-291, September.
    4. Khansa Zaman & Muhammad Saeed Rana & Umer Iftikhar, 2019. "A Multilevel Analysis of Job Demands and Intention to Resign Through Perceived Service Recovery Performance," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 11(2), pages 67-82, June.
    5. 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, University Library of Munich, Germany.
    6. 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.
    7. 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, September.
    8. Mourad Zmami & Ousama Ben-Salha, 2015. "The adjustment of plant-level investment to exchange rate fluctuations in Tunisia: do the size and the ownership structure matter?," Economics Bulletin, AccessEcon, vol. 35(4), pages 2487-2505.
    9. Maja Nikšić Radić, 2018. "Terrorism as a Determinant of Attracting FDI in Tourism: Panel Analysis," Sustainability, MDPI, vol. 10(12), pages 1-17, December.
    10. Shauna Phillips & Fredoun Z. Ahmadi-Esfahani, 2008. "Exchange rates and foreign direct investment: theoretical models and empirical evidence ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(4), pages 505-525, December.
    11. Warren Moraghen & Boopen Seetanah & Noor Ul Haq Sookia, 2023. "The impact of exchange rate and exchange rate volatility on Mauritius foreign direct investment: A sector‐wise analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 208-224, January.
    12. Maria Borga & Perla Ibarlucea Flores & Monika Sztajerowska, 2020. "Drivers of divestment decisions of multinational enterprises - A cross-country firm-level perspective," OECD Working Papers on International Investment 2019/03, OECD Publishing.
    13. Marek Dabrowski, 2006. "A Strategy for EMU Enlargement," Springer Books, in: Marek Dabrowski & Jacek Rostowski (ed.), The Eastern Enlargement of the Eurozone, chapter 0, pages 199-225, Springer.
    14. Zerrin KILI ARSLAN, 2018. "The Relationship between Exchange Rate Volatility and Foreign Direct Investment in Turkey: Toda and Yamamoto Causality Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 8(4), pages 61-67.
    15. Kimiagari, Salman & Mahbobi, Mohammad & Toolsee, Tushika, 2023. "Attracting and retaining FDI: Africa gas and oil sector," Resources Policy, Elsevier, vol. 80(C).
    16. Piotr Mielus, 2012. "Market Measures of Convergence in Central & Eastern Europe Emerging Markets in the Period of Turbulences on the Financial Market," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 31.
    17. 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.
    18. Balaban, Suzana & Živkov, Dejan & Milenković, Ivan, 2019. "Impact of an unexplained component of real exchange rate volatility on FDI: Evidence from transition countries," Economic Systems, Elsevier, vol. 43(3).
    19. Maela Giofré & Oleksandra Sokolenko, 2023. "Cross-border investment and the decline of exchange rate volatility: implications for Euro area bilateral investments," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 159(3), pages 595-627, August.
    20. Muhammad Jalib Sikandar & Fazale Wahid, 2019. "Debt and Economic Growth of Pakistan; Role of Uncertain Economic and Political Conditions," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 11(2), pages 83-106, June.
    21. Pradeep Kumar DAS, 2018. "Macroeconomic uncertainty and FDI in developing countries," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(614), S), pages 15-30, Spring.
    22. Nicholas Apergis & Dimitrios Asteriou & Kalliroi Papathoma, 2013. "The Explanatory Variables of Outward Foreign Direct Investment: Panel Evidence," American Journal of Economics and Business Administration, Science Publications, vol. 4(4), pages 207-215, July.
    23. Phillips, Shauna & Ahmadi-Esfahani, Fredoun Z., 2008. "Exchange Rates and Foreign Direct Investment: Theoretical Models and Empirical Evidence," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(4), pages 1-21.
    24. Tokunaga, Masahiro & Iwasaki, Ichiro, 2014. "Transition and FDI: A Meta-Analysis of the FDI Determinants in Transition Economies," RRC Working Paper Series 47, Russian Research Center, Institute of Economic Research, Hitotsubashi University.
    25. Gérard Duchêne & Mathilde Maurel & Boris Najman, 2004. "Élargissement de lUnion européenne : présentation générale," Économie et Prévision, Programme National Persée, vol. 163(2), pages 1-16.

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