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Foreign Direct Investment and Real Exchange Rate Interlinkages

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  • Nikolina Kosteletou
  • Panagiotis Liargovas

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Abstract

This paper examines theoretically and empirically the relationship between Foreign Direct Investment and the real exchange rate. It is found that in large countries with freely floating currencies, such as the USA, the UK and Japan, causality runs from the real exchange rate to FDI. These results are consistent with the predictions of models of financial behavior. Causality runs both ways in small countries with fixed or “quasi” fixed currencies, such as the EU countries. These results are consistent with models, which emphasize on trade integration. It is shown that a weaker euro will not have uniform effects on FDI inflows across the unified Europe. Copyright Kluwer Academic Publishers 2000

Suggested Citation

  • Nikolina Kosteletou & Panagiotis Liargovas, 2000. "Foreign Direct Investment and Real Exchange Rate Interlinkages," Open Economies Review, Springer, vol. 11(2), pages 135-148, April.
  • Handle: RePEc:kap:openec:v:11:y:2000:i:2:p:135-148
    DOI: 10.1023/A:1008383821669
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    References listed on IDEAS

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    4. Kenneth A. Froot & Jeremy C. Stein, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1191-1217.
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    Cited by:

    1. Thomas A. Lubik & Katheryn N. Russ, 2012. "Exchange rate volatility in a simple model of firm entry and FDI," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 51-76.
    2. repec:kap:openec:v:29:y:2018:i:1:d:10.1007_s11079-017-9469-5 is not listed on IDEAS
    3. Asamoah, Michael Effah & Adjasi, Charles K.D. & Alhassan, Abdul Latif, 2016. "Macroeconomic uncertainty, foreign direct investment and institutional quality: Evidence from Sub-Saharan Africa," Economic Systems, Elsevier, vol. 40(4), pages 612-621.
    4. Hernán Herrera-Echeverri & Jerry Haar & Alexander Arrieta Jiménez & Manuel Araújo Zapata, 2015. "Devaluation, Competitiveness And New Business Formation In Emerging Countries," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 20(03), pages 1-22, September.
    5. Tokunbo S. OSINUBI & Lloyd A. AMAGHIONYEODIWE, 2010. "Foreign Private Investment And Economic Growth In Nigeria," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 5, pages 105-127, June.
    6. repec:fip:fedreq:y:2012:i:1q:p:51-76:n:vol.98no.1 is not listed on IDEAS
    7. Zvi Eckstein & Amit Friedman, 2011. "The equilibrium real exchange rate for Israel," BIS Papers chapters,in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 201-213 Bank for International Settlements.
    8. repec:kap:atlecj:v:45:y:2017:i:4:d:10.1007_s11293-017-9549-3 is not listed on IDEAS
    9. Panagiotis Liargovas & Konstantinos Skandalis, 2012. "Foreign Direct Investment and Trade Openness: The Case of Developing Economies," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 106(2), pages 323-331, April.
    10. Osinubi, T. S. & Amaghionyeodiwe, L. A, 2009. "Foreign Direct Investment and Exchange Rate Volatility in Nigeria," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 9(2).
    11. Mehmet Horasanli, 2007. "Comparing the Convergence Behaviour of Binomial and Trinomial Models," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 9(34), pages 17-34.
    12. Omer Yilmaz & Bener Gungor & Vedat Kaya, 2007. "Cointegration and Causality Between Macroeconomic Variables and Share Prices," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 9(34), pages 1-16.
    13. repec:pal:easeco:v:44:y:2018:i:1:d:10.1057_eej.2016.9 is not listed on IDEAS
    14. Shauna Phillips & Fredoun Z. Ahmadi-Esfahani, 2008. "Exchange rates and foreign direct investment: theoretical models and empirical evidence ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(4), pages 505-525, December.
    15. Choi, Jongmoo Jay & Jeon, Bang Nam, 2007. "Financial factors in foreign direct investments: A dynamic analysis of international data," Research in International Business and Finance, Elsevier, vol. 21(1), pages 1-18, January.
    16. Hasan Vergil & Hamza Cestepe, 2007. "Foreign Direct Investment and Real Exchange Rate: A Causality Analysis," Istanbul Stock Exchange Review, Research and Business Development Department, Borsa Istanbul, vol. 9(34), pages 35-44.
    17. Phillips, Shauna & Ahmadi-Esfahani, Fredoun Z., . "Exchange Rates and Foreign Direct Investment: Theoretical Models and Empirical Evidence," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society.
    18. Cantah, William Godfred & Wiafe, Emmanuel Agyapong & Adams, Abass, 2013. "Foreign direct investment and trade policy openness in Sub-Saharan Africa," MPRA Paper 58074, University Library of Munich, Germany.
    19. Christian Aubin & Jean-Pierre Berdot & Daniel Goyeau & Jacques Léonard, 2006. "Investissements directs américains et européens dans les PECOs. Quel rôle des effets de change ?," Revue économique, Presses de Sciences-Po, vol. 57(4), pages 771-792.

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    Keywords

    FDI; real exchange rate;

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