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Exchange Rate as a Determinant of Foreign Direct Investment: Does it Really Matter? Theoretical Aspects, Literature Review and Applied Proposal

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  • Isabel Ruiz

    (Western Michigan University)

Abstract

This paper re-examines the role of exchange rates as determinant of FDI. It extends the analysis to include the issue of how exchange rates determine the decision of invest in one country depending on whether the firm is deciding to invest on the country to service the local market or to invest on the country in order to re-export. This paper offers a broad literature review of the state of the empirical research in order to draw conclusions of the real importance of the exchange rate as a determinant of FDI. Details of FDI current behavior in Latin American are described and I propose a model of FDI to be applied for these countries. Data sources are given.

Suggested Citation

  • 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, EconWPA.
  • Handle: RePEc:wpa:wuwpit:0511016
    Note: Type of Document - pdf; pages: 20. Published in 'Ecos de Economia' at
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    File URL: http://econwpa.repec.org/eps/it/papers/0511/0511016.pdf
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    References listed on IDEAS

    as
    1. Bettina Becker, 2003. "Foreign Direct Investment in Industrial R&D and Exchange Rate Uncertainty in the UK," National Institute of Economic and Social Research (NIESR) Discussion Papers 217, National Institute of Economic and Social Research.
    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. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    4. Agnès Bénassy-Quéré & Lionel Fontagné & Amina Lahrèche-Revil, 1999. "Exchange Rate Strategies in the Competition for Attracting FDI," Working Papers 1999-16, CEPII research center.
    5. Linda S. Goldberg & Michael W. Klein, 1996. "Foreign direct investment, trade, and real exchange rate linkages in developing countries," Proceedings, Federal Reserve Bank of San Francisco, pages 73-100.
    6. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-564, September.
    7. Campa, Jose M., 2002. "Exchange rate crises and bilateral trade flows in Latin America," IESE Research Papers D/470, IESE Business School.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    FDI; Exchange Rates; Exchange Rates Volatility;

    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business

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