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

Manop Udomkerdmongkol, Oliver Morrissey and Holger Görg

Review of Development Economics, 2009, vol. 13, issue 4, 754-764

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.

Date: 2009
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