Exchange Rates and Competition for FDI in Asia

Posted: 4 Nov 2005

See all articles by Yuqing Xing

Yuqing Xing

National Graduate Institute for Policy Studies

Guanghua Wan

Asian Development Bank Institute

Multiple version iconThere are 2 versions of this paper

Abstract

This paper argues that relative exchange rates between the host countries of foreign direct investment affect their competition for FDI. Specifically, if the host country currency appreciates against the source country's currency more than that of its rival, FDI inflows of the host country will decrease, while FDI inflows increase in the rival country. Using the data of Japanese FDI in nine Asian manufacturing sectors from 1981 to 2002, the paper examines the hypothesis in the context of the competition between China and ASEAN 4 (Indonesia, Malaysia, the Philippines and Thailand). Empirical results show that the relative exchange rate is a statistically significant factor that determines the relative inflows of Japanese FDI for manufacturing as a whole, and for such sub-sectors as textiles, food, electronics, transportation equipment, and others. Exchange rate polices of China and ASEAN-4 played a critical role in dynamically reshaping the geographic distribution of Japanese FDI in Asia.

Keywords: FDI, exchange rate, China, Japan, ASEAN-4

JEL Classification: F14, F23, F31

Suggested Citation

Xing, Yuqing and Wan, Guanghua, Exchange Rates and Competition for FDI in Asia. The World Economy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=836184

Yuqing Xing (Contact Author)

National Graduate Institute for Policy Studies ( email )

Japan
81-3-6439-6141 (Phone)
81-3-6439-6010 (Fax)

Guanghua Wan

Asian Development Bank Institute ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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