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THE IMPACT OF EXCHANGE RATE ON FDI AND THE INTERDEPENDENCE OF FDI OVER TIME

Joseph D. Alba (), Peiming Wang and Donghyun Park ()
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Joseph D. Alba: Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, Singapore
Peiming Wang: Faculty of Business, Auckland, University of Technology, Private Bag 92006, Auckland, 1020, New Zealand

The Singapore Economic Review (SER), 2010, vol. 55, issue 04, 733-747

Abstract: We examine the impact of exchange rates on foreign direct investment (FDI) inflows into the United States in the context of a model that allows for the interdependence of FDI over time. Interdependence is modeled as a two-state Markov process where the two states can be interpreted as either a favorable or an unfavorable environment for FDI in an industry. We use unbalanced industry-level panel data from the US wholesale trade sector and our analysis yields two main results. First, we find evidence that FDI is interdependent over time. Second, under a favorable FDI environment, the exchange rate has a positive and significant effect on the average rate of FDI inflows.

Keywords: Exchange rate; FDI; Markov; unbalanced panel; F31; F21; F23 (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1142/S0217590810004024

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