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Nominal and real volatility as determinants of FDI

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  • Lilia Cavallari
  • Stefano d'Addona

Abstract

This article examines the role of country-specific sources of output and interest rate or exchange rate volatility in driving Foreign Direct Investment (FDI) activities. Building on a dataset with bilateral FDI flows among 24 Organization for Economic Co-operation and Development (OECD) economies over the period 1985--2007, we find that nominal and real volatility strongly deter foreign investments. Output and exchange rate volatility matter in particular for the decision whether to invest in a foreign country in the first place. Interest rate volatility mainly influences the amount of foreign investments.

Suggested Citation

  • 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.
    • Handle: RePEc:taf:applec:v:45:y:2013:i:18:p:2603-2610
    DOI: 10.1080/00036846.2012.674206
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    References listed on IDEAS

    as
    1. W. Jos Jansen & Ad C.J. Stokman, 2004. "Foreign Direct Investment and International Business Cycle Comovement," Macroeconomics 0402029, University Library of Munich, Germany.
    2. Michael Artis, 2003. "Is there a European Business Cycle?," CESifo Working Paper Series 1053, CESifo.
    3. 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.
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