The effect of exchange rate risk on US foreign direct investment: an empirical analysis

Christian Schmidt and Udo Broll

No 09/08, Dresden Discussion Paper Series in Economics from Technische Universität Dresden, Faculty of Business and Economics, Department of Economics

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
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Citations: View citations in EconPapers (3)

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Working Paper: The effect of exchange rate risk on U.S. foreign direct investment: An empirical analysis (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuddps:0908

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