Exchange rate movements and foreign direct investment (FDI): Japanese investment in Asia, 1987–2008

Shinji Takagi and Zongying Shi

Japan and the World Economy, 2011, vol. 23, issue 4, 265-272

Abstract: The paper estimates the impact of exchange rate movements on foreign direct investment (FDI). By using the panel data of Japanese FDI flows to nine dynamic Asian economies during 1987–2008, the paper finds that (i) FDI declined with a depreciation of the yen against host country currencies; (ii) it increased with exchange rate volatility; and (iii) it was little affected by the Asian financial crisis, especially when disguised financial flows were removed from the data. A novel result concerns the negative response of FDI to the third moment of monthly exchange rate changes: the volume of FDI was smaller when the distribution was positively skewed (i.e., when the yen was biased towards relatively large depreciation shocks). If skewness proxies for expected mean-reverting changes, this supports the idea that source country investors care about the future stream of revenues and returns denominated in their own currency. These results are robust, with other standard control variables having statistically significant coefficients with expected signs.

Keywords: Exchange rate level; Exchange rate volatility; Exchange rate expectations; Foreign direct investment (FDI); Japanese FDI to Asia (search for similar items in EconPapers)
JEL-codes: F21 F31 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:japwor:v:23:y:2011:i:4:p:265-272

DOI: 10.1016/j.japwor.2011.08.001

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