FOREIGN DIRECT INVESTMENT AND EXCHANGERATES: A CASE STUDY OF U.S. FDI IN EMERGINGMARKET COUNTRIES

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. Threevariables are used to capture separate exchange rate effects. The nominal bilateral exchange rate tothe $US captures the value of the local currency (a higher value implies a cheaper currency andattracts FDI). Changes in the real effective exchange rate index (REER) proxy for expected changes inthe exchange rate: an increasing (decreasing) REER is interpreted as devaluation (appreciation)being expected, so that FDI is postponed (encouraged). The temporary component of bilateralexchange rates is a proxy for volatility of local currency, which discourages FDI...