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Foreign direct investment and exchange rate uncertainty in South-East Asia

  • Sylvia Gottschalk

    (National Institute of Economic and Social Research (NIESR), UK)

  • Stephen Hall

We investigate the relationship between exchange rate volatility, exchange rate risk diversification and the location of foreign direct investment in the manufacturing industries of Indonesia, Malaysia, Philippines and Thailand. We found a strong role for the yen|dollar exchange rate in location decisions of the US and Japanese investors. There is evidence in the literature that Japanese firms invest in Asia to circumvent the appreciation of the yen. Our results show that the volatility of the yen and the correlation between local exchange rates and the yen are significant determinants of the US and Japanese investments in the region. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.355
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 13 (2008)
Issue (Month): 4 ()
Pages: 349-359

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Handle: RePEc:ijf:ijfiec:v:13:y:2008:i:4:p:349-359
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  1. Hernandez, Leonardo & Montiel, Peter J., 2003. "Post-crisis exchange rate policy in five Asian countries: Filling in the "hollow middle"?," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 336-369, September.
  2. Gorg, Holger & Wakelin, Katherine, 2002. "The Impact of Exchange Rate Volatility on US Direct Investment," Manchester School, University of Manchester, vol. 70(3), pages 380-97, June.
  3. Luca Ricci, 2006. "Uncertainty, Flexible Exchange Rates, and Agglomeration," Open Economies Review, Springer, vol. 17(2), pages 197-219, April.
  4. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
  5. Ding, Zhuanxin & Granger, Clive W. J., 1996. "Modeling volatility persistence of speculative returns: A new approach," Journal of Econometrics, Elsevier, vol. 73(1), pages 185-215, July.
  6. Takatoshi Ito, 2000. "Capital Flows in Asia," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 255-296 National Bureau of Economic Research, Inc.
  7. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  8. 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.
  9. Benassy-Quere, AgnEs & Fontagne, Lionel & LahrEche-Revil, Amina, 2001. "Exchange-Rate Strategies in the Competition for Attracting Foreign Direct Investment," Journal of the Japanese and International Economies, Elsevier, vol. 15(2), pages 178-198, June.
  10. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
  11. 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.
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