2009•Review of Development EconomicsRequires access

Exchange Rates and Outward Foreign Direct Investment: US FDI in Emerging Economies

Manop Udomkerdmongkol, Oliver Morrissey, Holger Görg

Abstract

Abstract 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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Key concepts: Foreign direct investment, Devaluation, Economics, Exchange rate, Currency, Depreciation (economics), Monetary economics, Local currency