The impact of deviation from relative purchasing power parity equilibrium on U.S. foreign direct investment
Analyzing inbound and outbound foreign direct investment (FDI) between the U.S. and seven developed countries over the period from 1994 to 2004, this study provides strong evidence for a positive relationship between aggregate FDI flows and a strengthening of a home currency. Further, taking exchange rate disequilibrium into account, we find that an increase in U.S. inbound FDI is related to a strengthening of an undervalued and overvalued U.S. dollar, while an increase in U.S. outbound FDI (foreign inbound FDI) is mainly related to a strengthening of an overvalued foreign currency. Disaggregate FDI flow data show that these findings hold mainly for the manufacturing (food and machinery) and the wholesale industry. We argue that our findings may provide evidence for a co-existence of the wealth-effect hypothesis and a more profit and production oriented hypothesis, once the U.S. dollar is undervalued. Additionally, the results support the argument that the profit and production oriented hypothesis dominates the wealth effect in developed countries, especially in the manufacturing and wholesale industry. Moreover, the results support the view that foreign investors are interested in how overvalued or undervalued a currency is, rather than being interested only in the recent direction of change in the exchange rate. Finally, all findings are robust with respect to several estimation procedures.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Goldberg, Linda S. & Kolstad, Charles D., 1994.
"Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty,"
94-23, C.V. Starr Center for Applied Economics, New York University.
- 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.
- Linda S. Goldberg & Charles D. Kolstad, 1994. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," NBER Working Papers 4815, National Bureau of Economic Research, Inc.
- 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.
- Kenneth A. Froot & Jeremy C. Stein, 1989. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," NBER Working Papers 2914, National Bureau of Economic Research, Inc.
- Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, June.
- Dickey, David A & Pantula, Sastry G, 1987. "Determining the Ordering of Differencing in Autoregressive Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 455-61, October.
- Lunn, John, 1980. "Determinants of U.S. direct investment in the E.E.C. : Further evidence," European Economic Review, Elsevier, vol. 13(1), pages 93-101, January.
- Goldberg, Linda S, 1993. "Exchange Rates and Investment in United States Industry," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 575-88, November.
- Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
- Blonigen, Bruce A, 1997. "Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment," American Economic Review, American Economic Association, vol. 87(3), pages 447-65, June.
- Paul De Grauwe & Guy Verfaille, 1988. "Exchange Rate Variability, Misalignment, and the European Monetary System," NBER Chapters, in: Misalignment of Exchange Rates: Effects on Trade and Industry, pages 77-104 National Bureau of Economic Research, Inc.
- Morey, Matthew R. & Simpson, Marc W., 2001. "To hedge or not to hedge: the performance of simple strategies for hedging foreign exchange risk," Journal of Multinational Financial Management, Elsevier, vol. 11(2), pages 213-223, April.
- Strauss, Jack, 1996. "The cointegrating relationship between productivity, real exchange rates and purchasing power parity," Journal of Macroeconomics, Elsevier, vol. 18(2), pages 299-313.
- Moosa, Imad A. & Cardak, Buly A., 2006.
"The determinants of foreign direct investment: An extreme bounds analysis,"
Journal of Multinational Financial Management,
Elsevier, vol. 16(2), pages 199-211, April.
- Imad A Moosa & Buly A Cardak, 2003. "The Determinants of Foreign Direct Investment: An Extreme Bounds Analysis," Working Papers 2003.02, School of Economics, La Trobe University.
- Arellano, M, 1987. "Computing Robust Standard Errors for Within-Groups Estimators," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 49(4), pages 431-34, November.
- Craig S. Hakkio, 1992. "Is purchasing power parity a useful guide to the dollar?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 37-51.
- Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Swenson, Deborah L., 1994. "The impact of U.S. tax reform on foreign direct investment in the United States," Journal of Public Economics, Elsevier, vol. 54(2), pages 243-266, June.
- Dewenter, Kathryn L, 1995. "Do Exchange Rate Changes Drive Foreign Direct Investment?," The Journal of Business, University of Chicago Press, vol. 68(3), pages 405-33, July.
- 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.
- Hendry, David F., 2001. "Achievements and challenges in econometric methodology," Journal of Econometrics, Elsevier, vol. 100(1), pages 7-10, January.
- Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
- Axel Grossmann & Gökçe Soydemir, 2006. "The impact of productivity adjusted deviations from PPP on the U.S. inbound FDI: Evidence from Japan, U.K. and Germany," Journal of Economics and Finance, Springer, vol. 30(2), pages 140-154, June.
- MacDonald, Ronald, 2000. "Concepts to Calculate Equilibrium Exchange Rates: An Overview," Discussion Paper Series 1: Economic Studies 2000,03, Deutsche Bundesbank, Research Centre.
- Orazio P. Attanasio & Lucio Picci & Antonello E. Scorcu, 2000. "Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 182-211, May.
- Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
- 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.
- Simpson, Marc W., 2004. "Selectively hedging the US dollar with foreign exchange futures contracts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(1), pages 75-86, February.
When requesting a correction, please mention this item's handle: RePEc:eee:quaeco:v:49:y:2009:i:2:p:521-550. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.