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Exchange Rate as a Determinant of Foreign Direct Investment: Does it Really Matter? Theoretical Aspects, Literature Review and Applied Proposal

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  • Isabel Ruiz

    (Western Michigan University)

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    Abstract

    This paper re-examines the role of exchange rates as determinant of FDI. It extends the analysis to include the issue of how exchange rates determine the decision of invest in one country depending on whether the firm is deciding to invest on the country to service the local market or to invest on the country in order to re-export. This paper offers a broad literature review of the state of the empirical research in order to draw conclusions of the real importance of the exchange rate as a determinant of FDI. Details of FDI current behavior in Latin American are described and I propose a model of FDI to be applied for these countries. Data sources are given.

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    File URL: http://128.118.178.162/eps/it/papers/0511/0511016.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series International Trade with number 0511016.

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    Length: 20 pages
    Date of creation: 27 Nov 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpit:0511016

    Note: Type of Document - pdf; pages: 20. Published in 'Ecos de Economia' at
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    Web page: http://128.118.178.162

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    Keywords: FDI; Exchange Rates; Exchange Rates Volatility;

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    1. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-64, September.
    2. Goldberg, Linda S & Kolstad, Charles D, 1995. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 855-73, November.
    3. Linda S. Goldberg & Michael Klein, 1996. "Foreign direct investment, trade, and real exchange rate linkages in developing countries," Proceedings, Federal Reserve Bank of San Francisco, pages 73-100.
    4. Agnès Bénassy-Quéré & Lionel Fontagné & Amina Lahrèche-Revil, 1999. "Exchange Rate Strategies in the Competition for Attracting FDI," Working Papers 1999-16, CEPII research center.
    5. Campa, Jose M., 2002. "Exchange rate crises and bilateral trade flows in Latin America," IESE Research Papers D/470, IESE Business School.
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