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Business cycle determinants of US foreign direct investments

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

This paper investigates the role of output fluctuations and exchange rate volatility in driving US foreign direct investments (FDI). Using a sample of 46 economies over the period 1982-2009, we provide 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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43616.

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Date of creation: Dec 2012
Handle: RePEc:pra:mprapa:43616
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  2. Kempf, Hubert & Gilchrist, Simon & Hairault, Jean-Olivier, 2002. "Monetary policy and the financial accelerator in a monetary union," Working Paper Series 0175, European Central Bank.
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  4. Eduardo Levy Yeyati & Ugo Panizza & Ernesto H. Stein, 2003. "The Cyclical Nature of North-South FDI Flows," Research Department Publications 4317, Inter-American Development Bank, Research Department.
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  6. 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.
  7. Bruce A. Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," NBER Working Papers 11299, National Bureau of Economic Research, Inc.
  8. 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.
  9. Bruce A. Blonigen & Jeremy Piger, 2014. "Determinants of foreign direct investment," Canadian Journal of Economics, Canadian Economics Association, vol. 47(3), pages 775-812, August.
  10. Katheryn Niles Russ, 2007. "Exchange Rate Volatility and First-Time Entry by Multinational Firms," NBER Working Papers 13659, National Bureau of Economic Research, Inc.
  11. Claudia M. Buch & Alexander Lipponer, 2005. "Business Cycles and FDI: Evidence from German Sectoral Data," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(4), pages 732-759, December.
  12. repec:fip:fedreq:y:2012:i:1q:p:51-76:n:vol.98no.1 is not listed on IDEAS
  13. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-116, March.
  14. Campa, Jose & Goldberg, Linda S., 1995. "Investment in manufacturing, exchange rates and external exposure," Journal of International Economics, Elsevier, vol. 38(3-4), pages 297-320, May.
  15. Kenneth A. Froot & Jeremy C. Stein, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1191-1217.
  16. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  17. repec:taf:applec:45:y:2013:i:18:p:2603-2610 is not listed on IDEAS
  18. Cavallari Lilia, 2007. "A Macroeconomic Model of Entry with Exporters and Multinationals," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-32, September.
  19. 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.
  20. Stevens, Guy V. G., 1998. "Exchange Rates and Foreign Direct Investment: A Note," Journal of Policy Modeling, Elsevier, vol. 20(3), pages 393-401, June.
  21. Russ, Katheryn Niles, 2007. "The endogeneity of the exchange rate as a determinant of FDI: A model of entry and multinational firms," Journal of International Economics, Elsevier, vol. 71(2), pages 344-372, April.
  22. Miao Wang & M. C. Sunny Wong, 2007. "Foreign Direct Investment Outflows and Business-cycle Fluctuations," Review of International Economics, Wiley Blackwell, vol. 15(1), pages 146-163, 02.
  23. 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.
  24. 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.
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