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Business cycle determinants of US foreign direct investments

Listed author(s):
  • Lilia Cavallari
  • Stefano D'Addona

This article investigates the role of output fluctuations and exchange rate volatility in driving US FDIs. Using a sample of 46 economies over the period 1982 to 2009, we provide the evidence of a positive relation between US FDI and host country's cyclical conditions. Allowing for asymmetry over the business cycle, we find that the output elasticity of foreign investments is higher in booms than in recessions. An increase in exchange rate volatility, on the other hand, has a strong deterrent effect on US foreign investments. This effect is fairly stable over the business cycle.

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File URL: http://hdl.handle.net/10.1080/13504851.2013.767971
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Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 20 (2013)
Issue (Month): 10 (July)
Pages: 966-970

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Handle: RePEc:taf:apeclt:v:20:y:2013:i:10:p:966-970
DOI: 10.1080/13504851.2013.767971
Contact details of provider: Web page: http://www.tandfonline.com/RAEL20

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References listed on IDEAS
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  2. 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.
  3. Lilia Cavallari & Stefano d'Addona, 2013. "Nominal and real volatility as determinants of FDI," Applied Economics, Taylor & Francis Journals, vol. 45(18), pages 2603-2610, June.
  4. Buch, Claudia M. & Lipponer, Alexander, 2005. "Business Cycles and FDI: Evidence from German Sectoral Data," Kiel Working Papers 1245, Kiel Institute for the World Economy (IfW).
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  7. Eduardo Levy Yeyati & Ugo Panizza & Ernesto H. Stein, 2003. "The Cyclical Nature of North-South FDI Flows," IDB Publications (Working Papers) 6502, Inter-American Development Bank.
  8. Bruce A. Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," NBER Working Papers 11299, National Bureau of Economic Research, Inc.
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  10. repec:fip:fedreq:y:2012:i:1q:p:51-76:n:vol.98no.1 is not listed on IDEAS
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  17. Assaf Razin & Efraim Sadka, 2007. "Introduction to Foreign Direct Investment: Analysis of Aggregate Flows," Introductory Chapters, in: Foreign Direct Investment: Analysis of Aggregate Flows Princeton University Press.
  18. Katheryn Russ, 2012. "Exchange rate volatility and first-time entry by multinational firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(2), pages 269-295, June.
  19. 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.
  20. Werner Holzl, 2005. "Tangible and intangible sunk costs and the entry and exit of firms in a small open economy: the case of Austria," Applied Economics, Taylor & Francis Journals, vol. 37(21), pages 2429-2443.
  21. 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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  24. Ester Faia, 2010. "Financial Frictions And The Choice Of Exchange Rate Regimes," Economic Inquiry, Western Economic Association International, vol. 48(4), pages 965-982, October.
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