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Exchange rate policy and the relative distribution of FDI among host countries

  • Xing, Yuqing

    ()

    (BOFIT)

This paper examines the FDI-exchange rate nexus in the context of one FDI source and two host countries. It focuses on the effect of exchange rates on relative FDI inflows between the two host countries. The theoretical analysis shows explicitly that relative FDI inflows are a function of relative real exchange rates. In particular, if one host country devalues its currency against that of the source country more than the other does, FDI into the former country will be expected to increase relative to the other country. The theoretical inference is examined with Japanese FDI in manufacturing industries of China and ASEAN-4 (Indonesia, Malaysia, the Philippines and Thailand). The empirical results generally support the theoretical conclusion, suggesting that the real devaluation of the Chinese Yuan undercut FDI into the ASEAN-4.

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File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/dp1506.pdf
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Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 15/2006.

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Length: 26 pages
Date of creation: 26 Oct 2006
Date of revision:
Handle: RePEc:hhs:bofitp:2006_015
Contact details of provider: Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
Web page: http://www.suomenpankki.fi/bofit_en/
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  1. Dewenter, Kathryn L, 1995. "Do Exchange Rate Changes Drive Foreign Direct Investment?," The Journal of Business, University of Chicago Press, vol. 68(3), pages 405-33, July.
  2. Yuqing Xing & Guanghua Wan, 2006. "Exchange Rates and Competition for FDI in Asia," The World Economy, Wiley Blackwell, vol. 29(4), pages 419-434, 04.
  3. Michael W. Klein & Eric S. Rosengren, 1992. "The real exchange rate and foreign direct investment in the United States: relative wealth vs. relative wage effects," Working Papers 92-2, Federal Reserve Bank of Boston.
  4. Froot, Kenneth A & Stein, Jeremy C, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1191-217, November.
  5. Linda S. Goldberg & Michael W. Klein, 1997. "Foreign Direct Investment, Trade and Real Exchange Rate Linkages in Developing Countries," NBER Working Papers 6344, National Bureau of Economic Research, Inc.
  6. 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.
  7. Blonigen, Bruce A, 1997. "Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment," American Economic Review, American Economic Association, vol. 87(3), pages 447-65, June.
  8. Laixun Zhao & Yuqing Xing, 2006. "Global Production and Currency Devaluation," Review of International Economics, Wiley Blackwell, vol. 14(2), pages 202-211, 05.
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