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Navigating Global Markets: Unveiling the Interplay between Foreign Exchange and Foreign Direct Investment via FX-FDI Tracker
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In theory, changes in a host country exchange rate can be a cause or consequence of changes in its level of foreign direct investment (FDI), and recent incidences suggest that government stability may have sizable implications for the interactions between FDI and the exchange rate. This paper uses a semiparametric system of simultaneous equations to empirically characterize the relationship between FDI and the exchange rate, with each country’s level of government stability serving as a moderator. The results suggest that across developed and developing economies the most prevalent type of symbiosis between FDI and the exchange rate is a positive effect of FDI on the exchange rate, but no effect of the exchange rate on FDI. This significant FDI effect is heterogeneous, with an interquartile range of 1.241. At the median, a 10% increase in FDI inflows relative to GDP causes approximately a 13.29% increase in the annual change in the exchange rate. Government stability acts as a moderator variable by strengthening the relationship between FDI and the exchange rate in some countries, but eliminates the relationship in other countries.
Although it is widely recognized that Foreign Direct Investment (FDI) inflows have a dominant effect on economic growth of host countries, the determinants of FDI inflows are still unclear. Especially, about the effect of exchange rate on FDI inflow, the results reached by scholars vary across countries or regions. It is of great practical and theoretical significance to explore the influencing effects of exchange rate on FDI inflow and identify the mechanisms that underlie them in close association with regional economic characters so as to help local government implement targeted government policies to achieve sustainable FDI inflow and sustainable economic growth. For this purpose, the influencing effects and the influencing mechanisms of the exchange rate on FDI inflows are investigated for Zhejiang province, China, over 1985–2019 by employing the co-integration tests, vector error correction models, Granger causality tests, and impulse response tests. Empirical results indicate that there are long-term stable and unidirectional causal relationship between the exchange rate and FDI inflow. Continuous appreciation of RMB against USD discourages FDI inflow. The mechanism which underlies the long-term relationship is the wealth effect, rather than the cost effect or the demand effect. By contrast, in the short run, neither the exchange rate nor the three influencing mechanism has a significant impact on FDI inflow. These results suggest policy recommendations for improving FDI by accumulating human capital and improving infrastructure. These findings are also applicable for other countries or regions with similar economic characters.
The paper seeks to determine the effect of exchange rate volatility on foreign direct investment in Ghana from 1986 to 2017. The study adopted the Generalized Autoregressive Conditional Heteroskedasticity model to fit the data set from 1986-2017. The results indicate that, previous quarter information can influence current quarter volatility in Foreign Direct Investment. Real exchange rate, gross domestic product and treasure bill rate considered as external factors, are all found to be significant. This shows that, volatility from these factors can spillover to volatility in foreign direct investment. To ensure stable inflow of foreign direct investment, we recommend that policies should gear towards stability in the forex market and interest rate among others.
Public foreign currency borrowing is a common problem of emerging markets. Scholars named it the original sin of foreign debt. It has a proven negative influence on economic growth and development, undermining financial stability, and increasing the probability of monetary crises. The roots of the original sin often lay in emerging markets’ institutional underdevelopment, with low-quality monetary policy, inappropriate exchange rate regime choice, and exchange rate mismanagement being stated among the most important causes. This paper evaluates the influence of the exchange rate policy on the emission of foreign currency sovereign bonds in emerging markets. The relationship is estimated using panel data and GMM approach, with exchange rate regime type (both de jure and de facto ) and real exchange rate volatility serving as explanatory variables. The findings reveal that fixed exchange rate regime and high real exchange rate volatility is promoting the foreign currency borrowing. Thus countries that want to reduce the burden of the original sin should lean towards a more flexible exchange rate policy while maintaining their real exchange rate stable.
The inflows of foreign direct investment (FDI) are important for a country's economic development, but the world market for FDI has become more competitive. This paper empirically analyses the exchange rate movements and foreign direct investment (FDI) relationship using annual data on ASEAN economies, that is, Malaysia, the Philippines, Thailand, and Singapore. By employing ARDL bounds test approach, the empirical results show the existence of significant long-run cointegration between exchange rate and FDI for the case of Singapore, Malaysia, and the Philippines with all countries recording negative coefficient implying that the appreciation of Singapore dollar, Malaysian ringgit, and the Philippine peso has a positive impact on FDI inflows. Using the ECM based ARDL approach for causality test, both Singapore and the Philippines show long-run bidirectional causality between exchange rate and FDI whereas long-run unidirectional causality running from the exchange rate to FDI in Malaysia. Furthermore, this study also found that short-run unidirectional causality running from the exchange rate to FDI exists in Singapore.
Zusammenfassung Ungewißheit über Wechselkurse und Zustrom ausländischer Direkt-investitionen in die Vereinigten Staaten. - In diesem Aufsatz
wird zunächst versucht zu klären, auf welche Weise die Ungewißheit über die Entwicklung der Wechselkurse die ausländischen
Direktinvestitionen beeinflußt, und danach werden solche Wirkungen auf den Zufluß ausländischer Direktinvestitionen in die
Vereinigten Staaten getestet. Die theoretischen Wirkungen erwarteter Aufwertungen und von Risiken sind im allgemeinen nicht
eindeutig und hängen von der Produktions- und Absatzstruktur des multinationalen Unternehmens ab. Im empirischen Teil zeigt
sich, daß die Zuflüsse von Direktinvestitionen in die Vereinigten Staaten aus fünf anderen Ländern in signifikantem Maße negativ
mit einer erwarteten Dollar-Aufwertung und positiv mit einer Erhöhung der Wechselkursvariabilität verbunden sind. Dieses Ergebnis
ist konsistent mit den drei Typen von multinationalen Unternehmen, die sich in ihrer Produktions- und Absatzstruktur unterscheiden
und in dieser Arbeit betrachtet werden.
The authors examine the connection between exchange rates and foreign direct investment that arises when globally integrated capital markets are subjected to informational imperfections. These imperfections cause external financing to be more expensive than internal financing, so that changes in wealth translate into changes in the demand for direct investment. By systematically lowering the relative wealth of domestic agents, a depreciation of the domestic currency can lead to foreign acquisitions of certain domestic assets. The authors develop a simple model of this phenomenon and test for its relevance in determining international capital flows. Copyright 1991, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
This paper introduces a novel dataset on bilateral de-jure exchange rate regimes. The new dataset accounts for the fact that officially pegging to one currency is uninformative about the exchange rate regime prevailing vis-à-vis other currencies, and it allows characterizing bilateral exchange rate regimes based on countries’ ex-ante announcements rather than ex-post observations. We use this data to estimate the effect of expected exchange rate volatility on foreign direct investment (FDI). Starting from a simple model that suggests that announced exchange rate stability enhances bilateral FDI flows, we provide empirical evidence that lends support to this claim: countries that are linked by a non-floating exchange rate regime seem to attract significantly more FDI from each other. In particular, relationships with no separate legal tender like currency unions are most favorable to FDI in both developed and developing countries. Moreover, we find substantial differences between developing and developed countries, with the effect of announced exchange rate stability being much stronger for the former group than for the latter.
There has been a significant correlation between U.S. inward foreign direct investment and the United States real exchange rate since the 1970s. In this paper we examine the determinants of four measures of inward foreign direct investment to the United States from seven industrial countries over the period 1979–1991. We find strong evidence that relative wealth significantly affects U.S. inward foreign direct investment. We find no evidence that relative wages have a significant impact on the determination of U.S. foreign direct investment
The authors study the impact of corruption in a host country on foreign investors'preference for a joint venture, or a wholly owned subsidiary. Their simple model highlights a basic tradeoff in using local partners. On the one hand, corruption makes the local bureaucracy less transparent, and increases the value of using a local partner to cut through the bureaucratic maze. On the other hand, corruption decreases the effective protection of an investors'intangible assets, and reduces the probability that disputes between foreign and domestic partners, will be adjudicated fairly, which reduces the value of having a local partner. As the investor's technological sophistication increases, so does the importance of protecting intangible assets, which tilts the preference away from joint ventures in a corrupt country. Empirical tests of this hypothesis on firm-level data show that corruption reduces inward foreign direct investment, and shifts the ownership structure toward joint ventures. Conditional on foreign direct investment taking place, an increase in corruption from the level found in Hungary to that found in Azerbaijan, decreases the probability of a wholly owned subsidiary by 10 to 20 percent. Technologically more advanced firms are less likely to engage in joint ventures, however. The authors find support for the view that U.S. firms are more averse to joint ventures in corrupt countries than other foreign investors - possibly because the U.S. Foreign corrupt Practices Act, which stipulates penalties for executives of U.S. companies whose employees, or local partners engage in paying bribes. But although U.S. companies are more likely than investors from other countries to retain full ownership of firms in corrupt countries, they are not less likely than firms from other countries to undertake foreign direct investment in thosecountries.
Since unification, the debate about Germany's poor economic performance has focused on supply-side weaknesses, and the associated reform agenda sought to make low-skill labour markets more flexible. We question this diagnosis using three lines of argument. First, effective restructuring of the supply side in the core advanced industries was carried out by the private sector using institutions of the coordinated economy, including unions, works councils and blockholder owners. Second, the implementation of orthodox labour market and welfare state reforms created a flexible labour market at the lower end. Third, low growth and high unemployment are largely accounted for by the persistent weakness of domestic aggregate demand, rather than by the failure to reform the supply side. Strong growth in recent years reflects the successful restructuring of the core economy. To explain these developments, we identify the external pressures on companies in the context of increased global competition, the continuing value of the institutions of the coordinated market economy to the private sector and the constraints imposed on the use of stabilizing macroeconomic policy by these institutions. We also suggest how changes in political coalitions allowed orthodox labour market reforms to be implemented in a consensus political system.
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