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Exchange rate strategies in the competition for attracting FDI

Author

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  • Agnès Bénassy-Quéré

    (CEPII - Centre d'Etudes Prospectives et d'Informations Internationales)

  • Lionel Fontagné

    (TEAM - Théories et Applications en Microéconomie et Macroéconomie - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Amina Lahreche-Révil

    (UPJV - Université de Picardie Jules Verne, TEAM - Théories et Applications en Microéconomie et Macroéconomie - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales)

Abstract

Building on the needs for long term capital inflows in developing countries, this paper reconsiders the choice of an exchange-rate regime by integrating the determinants of multinational firms locations. The trade-off between price competitiveness and a stable nominal exchange rate is modeled. It is shown that exchange rate volatility is detrimental to foreign direct investment, and that its impact compares with misalignments. The main result is that the builfing of currency blocks could be a way of increasing FDI to emerging countries as a whole. The frontiers of monetary areas would then be strongly influenced by geography, as FDI is.

Suggested Citation

  • Agnès Bénassy-Quéré & Lionel Fontagné & Amina Lahreche-Révil, 2000. "Exchange rate strategies in the competition for attracting FDI," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-03773690, HAL.
  • Handle: RePEc:hal:cesptp:halshs-03773690
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03773690
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    2. Masahiro Kawai & Shinji Takagi, 2005. "Strategy for a Regional Exchange Rate Arrangement in East Asia: Analysis, Review and Proposal," Global Economic Review, Taylor & Francis Journals, vol. 34(1), pages 21-64.
    3. Jennifer Tobin & Susan Rose-Ackerman, 2003. "Foreign Direct Investment and the Business Environment in Developing Countries: the Impact of Bilateral Investment Treaties," William Davidson Institute Working Papers Series 587, William Davidson Institute at the University of Michigan.
    4. Jean Pisani-Ferry & Adam Posen, . "The euro at ten- the next global currency?," Books, Bruegel, number 303.
    5. Claudiu T. Albulescu, 2011. "Economic and Financial Integration of CEECs: The Impact of Financial Instability," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 5(1), pages 027-045, March.
    6. Jean-François Ponsot, 2000. "Le Currency board : les contraintes de financement et d'ajustement de la convertibilité intégrale," Working Papers hal-01527297, HAL.
    7. Thierry Mayer & Keith Head, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center.
    8. Arratibel, Olga & Furceri, Davide & Martin, Reiner & Zdzienicka, Aleksandra, 2011. "The effect of nominal exchange rate volatility on real macroeconomic performance in the CEE countries," Economic Systems, Elsevier, vol. 35(2), pages 261-277, June.
    9. Ayako Saiki, 2005. "Asymmetric Effect of Currency Union for Developing Countries," Open Economies Review, Springer, vol. 16(3), pages 227-247, July.
    10. Mariam Camarero & Sergi Moliner & Cecilio Tamarit, 2021. "Is there a euro effect in the drivers of US FDI? New evidence using Bayesian model averaging techniques," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 157(4), pages 881-926, November.
    11. Loïc Cadiou & Julien Genet & Jean-Louis Guérin, 2002. "Evolutions démographiques et marché du travail : des liens complexes parfois contradictoires," Working Papers 2002-16, CEPII research center.
    12. Brahim Razgallah, 2004. "La théorie des ZMO s'applique-t-elle aux pays en développement?," International Finance 0403003, University Library of Munich, Germany.
    13. Yuqing Xing & Guanghua Wan, 2004. "Exchange Rates and Competition for FDI," WIDER Working Paper Series RP2004-64, World Institute for Development Economic Research (UNU-WIDER).
    14. Kawai, Masahiro & Takagi, Shinji, 2000. "Proposed strategy for a regional exchange rate arrangement in post-crisis East Asia," Policy Research Working Paper Series 2503, The World Bank.
    15. Isabel Ruiz, 2005. "Exchange Rate as a Determinant of Foreign Direct Investment: Does it Really Matter? Theoretical Aspects, Literature Review and Applied Proposal," International Trade 0511016, University Library of Munich, Germany.
    16. Lahcen ACHY & Juliette Milgram, 2005. "Does a free trade area favors an optimum currency area? The Case of Morocco and the European Union," International Trade 0512012, University Library of Munich, Germany.
    17. José De Sousa & Julie Lochard, 2004. "Investissements directs étrangers et intégration : quels enseignements pour les Peco ?," Economie & Prévision, La Documentation Française, vol. 163(2), pages 87-100.
    18. Mariam Camarero & Sergi Moliner & Cecilio Tamarit, 2019. "Searching The Us Fdi Determinants In The Eu: Is There A Euro Effect?," Working Papers 1916, Department of Applied Economics II, Universidad de Valencia.
    19. Mariam Camarero & Sergi Moliner & Cecilio Tamarit, 2020. "Japan's FDI drivers in a time of financial uncertainty. New evidence based on Bayesian Model," Working Papers 2007, Department of Applied Economics II, Universidad de Valencia.
    20. Miotti, Luis Egidio & Plihon, Dominique & Quenan, Carlos, 2002. "Euro and the financial relations between Latin America and Europe: medium- and long-term implications," Macroeconomía del Desarrollo 5354, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    21. Ramkishen S. Rajan & Rahul Sen & Reza Y. Siregar, 2004. "Misalignment of the Baht and its Trade Balance Consequences for Thailand in the 1980s and 1990s," The World Economy, Wiley Blackwell, vol. 27(7), pages 985-1012, July.
    22. Camarero, Mariam & Moliner, Sergi & Tamarit, Cecilio, 2021. "Japan's FDI drivers in a time of financial uncertainty. New evidence based on Bayesian Model Averaging," Japan and the World Economy, Elsevier, vol. 57(C).
    23. PONSOT, Jean-François, 2000. "Le Currency Board : les contraintes de financement et d'ajustement de la convertibilité intégrale," LATEC - Document de travail - Economie (1991-2003) 2000-10, LATEC, Laboratoire d'Analyse et des Techniques EConomiques, CNRS UMR 5118, Université de Bourgogne.

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    More about this item

    Keywords

    Foreign direct investment; exchange rate regime; monetary regionalism; risk diversification; investissement direct; régime de change; régionalisme monétaire; diversification du risque;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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