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Exchange Rate and Political Risks, Again

Author

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  • Gregory Clare

    () (Rutgers University)

  • Ira N. Gang

    () (Rutgers University)

Abstract

We examine the effects of exchange rate and political risks on foreign direct investment (FDI) for multinationals. Our strategy is to examine FDI by U.S. firms at two levels: in all industries and on the subset of only firms in manufacturing industries. When investing in developed economies the firms appear to take past and present variation in exchange rates into consideration. When investing in less developed nations the past and present variation does not appear to weigh as heavily as the present and future variation. Decreasing political risk increases FDI.

Suggested Citation

  • Gregory Clare & Ira N. Gang, 2009. "Exchange Rate and Political Risks, Again," Departmental Working Papers 200903, Rutgers University, Department of Economics.
  • Handle: RePEc:rut:rutres:200903
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    References listed on IDEAS

    as
    1. Gregory Clare & Ira N. Gang, 2010. "Exchange Rate and Political Risks, Again," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(3), pages 46-58, May.
    2. Goldberg, Linda S & Kolstad, Charles D, 1995. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 855-873, November.
    3. Carstensen, Kai & Toubal, Farid, 2004. "Foreign direct investment in Central and Eastern European countries: a dynamic panel analysis," Journal of Comparative Economics, Elsevier, vol. 32(1), pages 3-22, March.
    4. Douglas Nigh, 1985. "The Effect of Political Events on United States Direct Foreign Investment: A Pooled Time-Series Cross-Sectional Analysis," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 16(1), pages 1-17, March.
    5. Busse, Matthias & Hefeker, Carsten, 2007. "Political risk, institutions and foreign direct investment," European Journal of Political Economy, Elsevier, vol. 23(2), pages 397-415, June.
    6. Gregory Clare, 1992. "The impact of exchange rate risk on the foreign direct investment of U.S. multinational manufacturing companies," Open Economies Review, Springer, vol. 3(2), pages 143-163, June.
    7. 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.
    8. Benassy-Quere, AgnEs & Fontagne, Lionel & LahrEche-Revil, Amina, 2001. "Exchange-Rate Strategies in the Competition for Attracting Foreign Direct Investment," Journal of the Japanese and International Economies, Elsevier, vol. 15(2), pages 178-198, June.
    9. Michal Brzozowski, 2006. "Exchange Rate Variability and Foreign Direct Investment: Consequences of EMU Enlargement," Eastern European Economics, Taylor & Francis Journals, vol. 44(1), pages 5-24, February.
    10. Marie E Wicks Kelly & George C Philippatos, 1982. "Comparative Analysis of the Foreign Investment Evaluation Practices by U.S.-Based Manufacturing Multinational Companies," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 13(3), pages 19-42, September.
    11. Biswas, Romita, 2002. "Determinants of Foreign Direct Investment," Review of Development Economics, Wiley Blackwell, vol. 6(3), pages 492-504, October.
    12. Kazuhiro Igawa, 1983. "Some Evidences between Foreign Direct Investments and Foreign Exchange Rates: A Preliminary Note," Kobe Economic & Business Review, Research Institute for Economics & Business Administration, Kobe University, vol. 29, pages 21-32.
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    Cited by:

    1. Gregory Clare & Ira N. Gang, 2010. "Exchange Rate and Political Risks, Again," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(3), pages 46-58, May.
    2. Ramazan Sari & Mehmet Uzunkaya & Shawkat Hammoudeh, 2013. "The Relationship Between Disaggregated Country Risk Ratings and Stock Market Movements: An ARDL Approach," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(1), pages 4-16, January.
    3. Ivan Deseatnicov & Hiroya Akiba, 2013. "Reconsideration of the Effects of Political Factors on FDI: Evidence from Japanese Outward FDI," Review of Economics & Finance, Better Advances Press, Canada, vol. 3, pages 35-48, February.
    4. Sung-Hoon Lim, 2011. "Risks in the North Korean Special Economic Zone: Context, Identification, and Assessment," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(1), pages 50-66, January.
    5. Deniz Ikizlerli & Numan Ülkü, 2012. "Political Risk and Foreigners' Trading: Evidence from an Emerging Stock Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(3), pages 106-121, May.
    6. Gregory Clare & Ira N. Gang, 2010. "Exchange Rate and Political Risks, Again," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 46(3), pages 46-58, May.
    7. Deniz Ikizlerli & Numan Ülkü, 2012. "Political Risk and Foreigners' Trading: Evidence from an Emerging Stock Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(3), pages 106-121, May.
    8. Uluc Aysun & Melanie Guldi, 2011. "Derivatives Market Activity in Emerging Markets and Exchange Rate Exposure," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(6), pages 46-67, November.
    9. Sung-Hoon Lim, 2011. "Risks in the North Korean Special Economic Zone: Context, Identification, and Assessment," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(1), pages 50-66, January.
    10. Ramazan Sari & Mehmet Uzunkaya & Shawkat Hammoudeh, 2013. "The Relationship Between Disaggregated Country Risk Ratings and Stock Market Movements: An ARDL Approach," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 49(1), pages 4-16, January.
    11. Uluc Aysun & Melanie Guldi, 2011. "Derivatives Market Activity in Emerging Markets and Exchange Rate Exposure," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 47(6), pages 46-67, November.

    More about this item

    Keywords

    Exchange Rates; Foreign Direct Investment; Uncertainty;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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