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Foreign Direct Investment And Exchange Rates: A Case Study Of U.S. Fdi In Emerging Market Countries

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  • Manop Udomkerdmongkol
  • Holger Görg
  • Oliver Morrissey

Abstract

This paper investigates the impact of exchange rates on US Foreign Direct Investment (FDI)inflows to a sample of 16 emerging market countries using panel data for the period 1990-2002. Threevariables are used to capture separate exchange rate effects. The nominal bilateral exchange rate tothe $US captures the value of the local currency (a higher value implies a cheaper currency andattracts FDI). Changes in the real effective exchange rate index (REER) proxy for expected changes inthe exchange rate: an increasing (decreasing) REER is interpreted as devaluation (appreciation)being expected, so that FDI is postponed (encouraged). The temporary component of bilateralexchange rates is a proxy for volatility of local currency, which discourages FDI. The results supportthe ‘Chakrabarti and Scholnick’ hypothesis that, ceteris paribus, there is a negative relationshipbetween the expectation of local currency depreciation and FDI inflows. Cheaper local currency(devaluation) attracts FDI while volatile exchange rates discourage FDI.

Suggested Citation

  • Manop Udomkerdmongkol & Holger Görg & Oliver Morrissey, 2006. "Foreign Direct Investment And Exchange Rates: A Case Study Of U.S. Fdi In Emerging Market Countries," Discussion Papers 06/05, University of Nottingham, School of Economics.
    • Handle: RePEc:not:notecp:06/05
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    Cited by:

    1. Warren Moraghen & Boopen Seetanah & Noor Sookia, 2019. "Explaining Heterogeneity in the Effect of the Exchange Rate and Exchange Rate Volatility on Foreign Direct Investment: A Meta‐Analysis Approach," African Development Review, African Development Bank, vol. 31(3), pages 275-291, September.
    2. Matthias Busse & Carsten Hefeker & Signe Nelgen, 2013. "Foreign Direct Investment and Exchange Rate Regimes," Economics Bulletin, AccessEcon, vol. 33(1), pages 843-858.
    3. Sagnik Bagchi & Surajit Bhattacharyya, 2019. "Country-Specific Determinants of Intra-Industry Trade in India," Foreign Trade Review, , vol. 54(3), pages 129-158, August.
    4. Askandarou Cheik Diallo & Luc Jacolin & Isabelle Rabaud, 2021. "Foreign direct investment and domestic private investment in Sub-Saharan African countries: crowding-in or out?," Working Papers hal-03232985, HAL.
    5. Thi Anh-Dao Tran & Thi Thanh Binh Dinh, 2014. "FDI inflows and trade imbalances: evidence from developing Asia," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 11(1), pages 147-169, June.
    6. Allah Ditta & Ahmad Hassan, 2017. "Nexus of Economic Misery, Interest rate, Exchange rate and Foreign Direct Investment in Pakistan," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 6(1), pages 35-44, March.
    7. Mohamed Isse Ibrahim & Zahir Mohamed Omar & Ali Yassin Sheikh Ali3, 2017. "The Determinants of Foreign Direct Investment in Somalia," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 713-720.
    8. Muhammad Zahid Naeem, 2021. "The Impact of Exchange Rate, Interest Rate and Economic Misery on Foreign Direct Investment: Empirics from Pakistan," Journal of Policy Research (JPR), Research Foundation for Humanity (RFH), vol. 7(1), pages 36-43, March.
    9. Jung Wan Lee, 2015. "Dynamic Relationships between Exchange Rates and Foreign Direct Investment: Empirical Evidence from Korea," Asian Economic Journal, East Asian Economic Association, vol. 29(1), pages 73-90, March.
    10. Manop Udomkerdmongkol & Oliver Morrissey & Holger Görg, 2009. "Exchange Rates and Outward Foreign Direct Investment: US FDI in Emerging Economies," Review of Development Economics, Wiley Blackwell, vol. 13(4), pages 754-764, November.

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