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Untying The Gordian Knot: The Multiple Links Between Exchange Rates and Foreign Direct Investment

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  • NIGEL PAIN
  • DESIRÉE VAN WELSUM

Abstract

Theoretical and empirical studies show that the level and volatility of exchange rates can have significant effects on foreign direct investment (FDI). But the evidence is ambiguous, with the impact of exchange rates being heterogeneous across countries and types of investment, and varying over time. Fixed exchange rate regimes may stimulate investment, but largely because of their indirect benefits for the investment climate rather than because of lower currency volatility, especially in larger economies. Careful judgements still need to be made about the appropriate entry rate, since real exchange rate levels can have a long‐lasting impact on the spatial distribution of economic activities and living standards.

Suggested Citation

  • Nigel Pain & Desirée Van Welsum, 2003. "Untying The Gordian Knot: The Multiple Links Between Exchange Rates and Foreign Direct Investment," Journal of Common Market Studies, Wiley Blackwell, vol. 41(5), pages 823-846, December.
    • Handle: RePEc:bla:jcmkts:v:41:y:2003:i:5:p:823-846
    DOI: 10.1111/j.1468-5965.2003.00465.x
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