The effect of exchange rate risk on U.S. foreign direct investment: An empirical analysis

MPRA Paper from University Library of Munich, Germany

Abstract: This paper empirically analyzes the impact of exchange rate uncertainty, exchange rate movements and expectations on foreign direct investment (FDI). Two competing specifications of exchange rate volatility are examined. The investigation is based on a cross-section time-series data set of U.S. outward FDI by industries to six major partner countries for the period 1984–2004. Using the standard deviation of the real exchange rate as a measure of risk it is found that exchange rate uncertainty has a discouraging effect on FDI flows across all industries. This is contrasted when applying an alternative risk specification defined as the unexplained part of real exchange rate volatility. Now, results show a clear distinction between non-manufacturing and manufacturing industries. U.S. FDI outflows in nonmanufacturing industries exhibit a positive correlation with increased exchange risk, whereas this relationship is negative for manufacturing industries in the underlying sample. A real appreciation of host-country currency was associated with higher FDI flows, while expectations about an appreciation showed a negative result.

Keywords: Foreign direct investment; real exchange rate risk; volatility (search for similar items in EconPapers)
JEL-codes: F21 F23 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-ifn
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/10713/1/MPRA_paper_10713.pdf original version (application/pdf)

Related works:
Working Paper: The effect of exchange rate risk on US foreign direct investment: an empirical analysis (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:10713

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().