Exchange Rates and Outward Foreign Direct Investment: Us FDI in Emerging Economies
11 Pages Posted: 14 Oct 2009
This paper investigates the effect of exchange rates on US foreign direct investment (FDI) flows to a sample of 16 emerging market countries using annual panel data for the period 1990–2002. Three separate exchange rate effects are considered: the value of the local currency (a cheaper currency attracts FDI); expected changes in the exchange rate (expected devaluation implies FDI is postponed); and exchange rate volatility (discourages FDI). The results reveal a negative relationship between FDI and more expensive local currency, the expectation of local currency depreciation, and volatile exchange rates. Stable exchange rate management can be important in attracting FDI.
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