Untying the Gordian Knot: The Multiple Links between Exchange Rates and Foreign Direct Investment

24 Pages Posted: 17 Mar 2004

See all articles by Nigel Pain

Nigel Pain

National Institute of Economic and Social Research (NIESR)

Desiree van Welsum

Organization for Economic Co-Operation and Development (OECD)

Abstract

Theoretical and empirical studies show that the level and volatility of exchange rates can have significant effects on foreign direct investment (FDI). But the evidence is ambiguous, with the impact of exchange rates being heterogeneous across countries and types of investment, and varying over time. Fixed exchange rate regimes may stimulate investment, but largely because of their indirect benefits for the investment climate rather than because of lower currency volatility, especially in larger economies. Careful judgements still need to be made about the appropriate entry rate, since real exchange rate levels can have a long-lasting impact on the spatial distribution of economic activities and living standards.

Suggested Citation

Pain, Nigel and van Welsum, Desiree, Untying the Gordian Knot: The Multiple Links between Exchange Rates and Foreign Direct Investment. Journal of Common Market Studies, Vol. 41, pp. 823-846, December 2003. Available at SSRN: https://ssrn.com/abstract=513640

Nigel Pain (Contact Author)

National Institute of Economic and Social Research (NIESR) ( email )

2 Dean Trench Street
Smith Square
London SW1P 3HE
United Kingdom
0171 222 7665 (Phone)
0171 654 1900 (Fax)

Desiree Van Welsum

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

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