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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.

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Bibliographic Info

Paper provided by CASE-Center for Social and Economic Research in its series CASE Network Studies and Analyses with number 0258.

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Length: 26 Pages
Date of creation: 2003
Date of revision:
Handle: RePEc:sec:cnstan:0258

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Keywords: foreign direct investment; exchange rate uncertainty and volatility; transition; euro adoption;

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References

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  1. Laura Resmini, 1999. "The Determinants of Foreign Direct Investment into the CEECs: New Evidence from Sectoral Patterns," LICOS Discussion Papers 8399, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  2. Sung, Hongmo & Lapan, Harvey E., 2000. "Strategic Foreign Direct Investment and Exchange Rate Uncertainty," Staff General Research Papers 1335, Iowa State University, Department of Economics.
  3. Bevan, Alan & Estrin, Saul, 2000. "The Determinants of Foreign Direct Investment in Transition Economies," CEPR Discussion Papers 2638, C.E.P.R. Discussion Papers.
  4. Chakrabarti, Avik, 2001. "The Determinants of Foreign Direct Investment: Sensitivity Analyses of Cross-Country Regressions," Kyklos, Wiley Blackwell, vol. 54(1), pages 89-113.
  5. Nada Mora & Ratna Sahay & Jeromin Zettelmeyer & Pietro Garibaldi, 2002. "What Moves Capital to Transition Economies?," IMF Working Papers 02/64, International Monetary Fund.
  6. Darby, Julia & Hughes Hallett, Andrew & Ireland, Jonathan & Piscitelli, Laura, 1998. "The Impact of Exchange Rate Uncertainty on the Level of Investment," CEPR Discussion Papers 1896, C.E.P.R. Discussion Papers.
  7. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  8. 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.
  9. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  10. Benassy-Quere, AgnEs & Fontagne, Lionel & LahrEche-Revil, Amina, 2001. "Exchange-Rate Strategies in the Competition for Attracting Foreign Direct Investment," Journal of the Japanese and International Economies, Elsevier, vol. 15(2), pages 178-198, June.
  11. Alan A. Bevan & Saul Estrin, 2000. "The Determinants of Foreign Direct Investment in Transition Economies," William Davidson Institute Working Papers Series 342, William Davidson Institute at the University of Michigan.
  12. Gastanaga, Victor M. & Nugent, Jeffrey B. & Pashamova, Bistra, 1998. "Host Country Reforms and FDI Inflows: How Much Difference do they Make?," World Development, Elsevier, vol. 26(7), pages 1299-1314, July.
  13. Noorbakhsh, Farhad & Paloni, Alberto & Youssef, Ali, 2001. "Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence," World Development, Elsevier, vol. 29(9), pages 1593-1610, September.
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Citations

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Cited by:
  1. Gregory Clare & Ira N. Gang, 2009. "Exchange Rate and Political Risks, Again," Departmental Working Papers 200903, Rutgers University, Department of Economics.
  2. 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, 09.
  3. 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.
  4. Phillips, Shauna & Ahmadi-Esfahani, Fredoun Z., . "Exchange Rates and Foreign Direct Investment: Theoretical Models and Empirical Evidence," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society.
  5. Marek Dabrowski, 2005. "A Strategy for EMU Enlargement," CASE Network Studies and Analyses 0290, CASE-Center for Social and Economic Research.
  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.

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