Exchange Rates and U.S. Foreign Direct Investment in the Global Processed Food Industry

This paper focuses on estimating the effects of the real FDI-weighted exchange rate on real U.S. foreign direct investment (FDI) in the global processed food industry. We use a straightforward production possibility framework as our theoretical basis to demonstrate the shift of production between countries on the basis of exchange rate fluctuations. The log-log regression model, derived from the theoretical model, gives statistically robust results to show that for the years 1983 to 2002, the exchange rate fluctuations, the level of fixed capital in the U.S. food industry, and the cost of materials in both the United States and abroad were major determinants of the stock of U.S. FDI in the global processed food industry. As the dollar appreciated, U.S. FDI increased. An overall conclusion is that countries with an undervalued exchange rate will experience increased FDI. Countries with overvalued exchange rates incur costs from lost export opportunities for domestic firms as well as discourage FDI.