The paper investigates the impact 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.
Udomkerdmongkol, M.; Morrissey, O.; Gorg, H. Exchange Rates and Outward Foreign Direct Investment: US FDI in Emerging Economies. UNU-WIDER, Helsinki, Finland (2008) 20 pp. ISBN 978-92-9230-15-158-3