BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
Exchange rate policy and the relative distribution of FDI among host countries
Abstract: This paper examines the FDI-exchange rate nexus in the
context of one FDI source and two host countries. It focuses on the effect
of exchange rates on relative FDI inflows between the two host countries.
The theoretical analysis shows explicitly that relative FDI inflows are a
function of relative real exchange rates. In particular, if one host
country devalues its currency against that of the source country more than
the other does, FDI into the former country will be expected to increase
relative to the other country. The theoretical inference is examined with
Japanese FDI in manufacturing industries of China and ASEAN-4 (Indonesia,
Malaysia, the Philippines and Thailand). The empirical results generally
support the theoretical conclusion, suggesting that the real devaluation of
the Chinese Yuan undercut FDI into the ASEAN-4.
Keywords: FDI; exchange rate; China; ASEAN-4; (follow links to similar papers)
JEL-Codes: F14; F23; F31; (follow links to similar papers)
26 pages, October 26, 2006
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