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Udomkerdmongkol, Manop
Görg, Holger
Morrissey, Oliver
Year of Publication: 
Series/Report no.: 
Discussion papers in economics 2006,05
This paper investigates the impact of exchange rates on US Foreign Direct Investment (FDI) inflows to a sample of 16 emerging market countries using panel data for the period 1990-2002. Three variables are used to capture separate exchange rate effects. The nominal bilateral exchange rate to the $US captures the value of the local currency (a higher value implies a cheaper currency and attracts FDI). Changes in the real effective exchange rate index (REER) proxy for expected changes in the exchange rate: an increasing (decreasing) REER is interpreted as devaluation (appreciation) being expected, so that FDI is postponed (encouraged). The temporary component of bilateral exchange rates is a proxy for volatility of local currency, which discourages FDI. The results support the ‘Chakrabarti and Scholnick’ hypothesis that, ceteris paribus, there is a negative relationship between the expectation of local currency depreciation and FDI inflows. Cheaper local currency (devaluation) attracts FDI while volatile exchange rates discourage FDI.
Document Type: 
Working Paper

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