Financial Factors in Foreign Direct Investments: A Dynamic Analysis of International Data
Jongmoo Jay Choi
Temple University; National Bureau of Economic Research (NBER); Temple University - International Business
Bang Nam Jeon
Drexel University - Department of Economics & International Business
November 22, 2008
Research in International Business and Finance, Vol. 21, pp. 1-18, 2007
In contrast to existing empirical foreign direct investment (FDI) studies that examine the static effects of strategic or real economic variables, this paper focuses on the impacts of financial variables on FDI outflows for four largest industrial countries using dynamic time series methods. The results show that FDI outflows are non-stationary but have a long-run cointegrating relationship with real exchange rates. In addition, there are causal effects of exchange rates on direct investments in the short run. Multivariate cointegration analysis shows the significance of financial channels such as cost of capital and real wealth through which the real exchange rate effects operate. The effects of financial channels are comparable to those of the real wage rate channel. Overall, the present paper provides significant and methodologically consistent international evidence for dynamic interactions between FDIs and financial variables.
Number of Pages in PDF File: 18
Keywords: FDI, real exchange rates, cost of capital, cointegration
JEL Classification: F21, F31
Date posted: November 23, 2008
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