The Real Exchange Rate and Foreign Direct Investment in the United States: Relative Wealth vs. Relative Wage Effects

28 Pages Posted: 19 Dec 2010

See all articles by Michael W. Klein

Michael W. Klein

Tufts University - The Fletcher School of Law and Diplomacy; National Bureau of Economic Research (NBER)

Eric S. Rosengren

Federal Reserve Bank of Boston - Supervision and Regulation

Date Written: October 1992

Abstract

There has been a significant correlation between United States inward foreign direct investment and the United States real exchange rate since the 1970s. Two alternative reasons for this relationship are that the real exchange rate affects the relative cost of labor and that the real exchange rate alters relative wealth across countries. In this paper we explore these alternatives by examining the determinants of four measures of inward foreign direct investment to the United States from seven industrial countries over the period 1979 to 1991. We find strong evidence that relative wealth significantly affects U.S. inward foreign direct investment. We find no evidence that relative wages have a significant impact on the determination of U.S. foreign direct investment. These results are robust to the choice of countries in our sample and when controlling for changes in tax codes.

Suggested Citation

Klein, Michael W. and Rosengren, Eric S., The Real Exchange Rate and Foreign Direct Investment in the United States: Relative Wealth vs. Relative Wage Effects (October 1992). NBER Working Paper No. w4192. Available at SSRN: https://ssrn.com/abstract=1728338

Michael W. Klein (Contact Author)

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Medford, MA 02155
United States
617-627-2718 (Phone)
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National Bureau of Economic Research (NBER)

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Eric S. Rosengren

Federal Reserve Bank of Boston - Supervision and Regulation ( email )

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Boston, MA 02210
United States
617-973-3090 (Phone)
617-973-3219 (Fax)

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