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Exchange Rates and Outward Foreign Direct Investment: US FDI in Emerging Economies

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Author Info
Udomkerdmongkol, Manop
Morrissey, Oliver
Gorg, Holger
Abstract

The paper investigates the impact of exchange rates on US foreign direct investment (FDI) flows to a sample of 16 emerging market countries using annual panel data for the period 1990-2002. Three separate exchange rate effects are considered: the value of the local currency (a cheaper currency attracts FDI); expected changes in the exchange rate (expected devaluation implies FDI is postponed); and exchange rate volatility (discourages FDI). The results reveal a negative relationship between FDI and more expensive local currency, the expectation of local currency depreciation, and volatile exchange rates. Stable exchange rate management can be important in attracting FDI.

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File URL: http://www.wider.unu.edu/stc/repec/pdfs/rp2008/rp2008-102.pdf
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Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Papers with number RP2008/102.

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Length: 20 pages
Date of creation: 2008
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Handle: RePEc:unu:wpaper:rp2008-102

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Keywords: exchange rate; FDI; foreign exchange;

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  4. Menzie D. Chinn, 2005. "A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation," NBER Working Papers 11521, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Froot, Kenneth A & Stein, Jeremy C, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1191-217, November. [Downloadable!] (restricted)
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  6. Carlson, John A. & Osler, C. L., 2000. "Rational speculators and exchange rate volatility1," European Economic Review, Elsevier, vol. 44(2), pages 231-253, February. [Downloadable!] (restricted)
  7. Busse, Matthias & Hefeker, Carsten, 2005. "Political Risk, Institutions and Foreign Direct Investment," Discussion Paper Series 26388, Hamburg Institute of International Economics. [Downloadable!]
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  8. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-53, March. [Downloadable!] (restricted)
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  11. Rajesh Chakrabarti & Barry Scholnick, 2002. "Exchange rate expectations and foreign direct investment flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 138(1), pages 1-21, March. [Downloadable!] (restricted)
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  16. Klein, Michael W. & Rosengren, Eric, 1994. "The real exchange rate and foreign direct investment in the United States : Relative wealth vs. relative wage effects," Journal of International Economics, Elsevier, vol. 36(3-4), pages 373-389, May. [Downloadable!] (restricted)
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  17. Campa, Joe Manuel, 1993. "Entry by Foreign Firms in the United States under Exchange Rate Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 614-22, November. [Downloadable!] (restricted)
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