Financial Factors in Foreign Direct Investments: A Dynamic Analysis of International Data

Research in International Business and Finance, Vol. 21, pp. 1-18, 2007

18 Pages Posted: 23 Nov 2008  

Jongmoo Jay Choi

Temple University; National Bureau of Economic Research (NBER); Temple University - International Business

Bang Nam Jeon

Drexel University-School of Economics

Date Written: November 22, 2008

Abstract

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.

Keywords: FDI, real exchange rates, cost of capital, cointegration

JEL Classification: F21, F31

Suggested Citation

Choi, Jongmoo Jay and Jeon, Bang Nam, Financial Factors in Foreign Direct Investments: A Dynamic Analysis of International Data (November 22, 2008). Research in International Business and Finance, Vol. 21, pp. 1-18, 2007. Available at SSRN: https://ssrn.com/abstract=1305658

Jongmoo Jay Choi (Contact Author)

Temple University ( email )

Fox School of Business
Temple University
Philadelphia, PA 19122
United States
215-204-5084 (Phone)
215-204-1697 (Fax)

HOME PAGE: http://astro.temple.edu/~jjchoi

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Temple University - International Business ( email )

Philadelphia, PA 19122
United States

Bang Nam Jeon

Drexel University-School of Economics ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

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