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Exchange rate, political environment and FDI decision

Ivan Deseatnicov and Hiroya Akiba ()

International Economics, 2016, issue 148, 16-30

Abstract: We examine the role of exchange rate (ER) and political environment (PE) alterations in determining Japanese Multinational Companies’ (MNCs) investment decisions. First, we present a model where MNCs make an investment decision under uncertainty. Second, we employ a panel data analysis of 56 developed and developing countries for the period of 1995–2012 (country and industry level). The main findings show that MNCs are less likely to tolerate exchange rate risk and political risk in developing countries. However, they may tolerate these risks in developed countries if the level of initial stability is far enough than their essential need. Results of the cross-effect analysis imply a complementarity of these risks. The impact of ER expectation remained ambiguous. Various interpretations and mechanisms are discussed.

Keywords: Foreign direct investment; Multinational companies; Exchange rate volatility; Exchange rate expectation; Political environment (search for similar items in EconPapers)
JEL-codes: F21 F23 (search for similar items in EconPapers)
Date: 2016
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