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Exchange rate, political environment and FDI decision

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  • Deseatnicov, Ivan
  • Akiba, Hiroya

Abstract

We examine the role of exchange rate (ER) and political environment (PE) alterations in determining Japanese Multinational Companies’ (MNCs) investment decisions. First, we present a model where MNCs make an investment decision under uncertainty. Second, we employ a panel data analysis of 56 developed and developing countries for the period of 1995–2012 (country and industry level). The main findings show that MNCs are less likely to tolerate exchange rate risk and political risk in developing countries. However, they may tolerate these risks in developed countries if the level of initial stability is far enough than their essential need. Results of the cross-effect analysis imply a complementarity of these risks. The impact of ER expectation remained ambiguous. Various interpretations and mechanisms are discussed.

Suggested Citation

  • Deseatnicov, Ivan & Akiba, Hiroya, 2016. "Exchange rate, political environment and FDI decision," International Economics, Elsevier, vol. 148(C), pages 16-30.
    • Handle: RePEc:eee:inteco:v:148:y:2016:i:c:p:16-30
    DOI: 10.1016/j.inteco.2016.05.002
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    Cited by:

    1. Arif, Asma & An, Pengli & Qi, Yajie & Li, Huajiao & An, Haizhong & Hussain, Mujahid & Wang, Yanli, 2021. "The influence factors of the national roles in the FDI network: A combined methods of complex networks and Panel Data Analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 563(C).
    2. Niaz Morshed & Mohammad Razib Hossain, 2022. "Causality analysis of the determinants of FDI in Bangladesh: fresh evidence from VAR, VECM and Granger causality approach," SN Business & Economics, Springer, vol. 2(7), pages 1-28, July.
    3. Nachiket Thakkar & Kiran Ambreen Ayub, 2022. "External Debt Default and Foreign Direct Investments," Bulletin of Applied Economics, Risk Market Journals, vol. 9(2), pages 223-237.
    4. Huazhang Wang & Daji Ergu & Wenjiao Zai, 2023. "Effect of Chinese Currency Appreciation on Investments in Renewable Energy Projects in Countries along the Belt and Road," Sustainability, MDPI, vol. 15(3), pages 1-23, January.
    5. Ai Ngoc Nhan Le & Ha Pham & Dung Thi Ngoc Pham & Khoa Dang Duong, 2023. "Political stability and foreign direct investment inflows in 25 Asia-Pacific countries: the moderating role of trade openness," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-9, December.
    6. Wira Ganet Aribowo, 2018. "Analysis of foreign direct investment as a comparison of macroeconomic factors in seven countries Asean 5, China and Japan during period 1996-2015," Journal of Economic Development, Environment and People, Alliance of Central-Eastern European Universities, vol. 7(4), pages 29-42, December.
    7. Samra Tabassam & Maisam Ali, 2019. "Linking Mechanism of Inward FDI and Bilateral Exchange Rate," Asian Development Policy Review, Asian Economic and Social Society, vol. 7(1), pages 43-51, March.
    8. Adolfo Maza & Paula Gutiérrez-Portilla, 2022. "Outward FDI and exports relation: A heterogeneous panel approach dealing with cross-sectional dependence," International Economics, CEPII research center, issue 170, pages 174-189.
    9. Kang, Xuhua & Zhang, Jingchao & Zhang, Huaming & Li, Shenzhao & Zhang, Yuzheng & Zhang, Kai & Li, Danqing, 2021. "Research on economic risk early-warning of China's overseas investment of coal-fired power generation: Take Indonesia as an example," Structural Change and Economic Dynamics, Elsevier, vol. 56(C), pages 298-309.
    10. Gonchar, Ksenia & Greve, Maria, 2022. "The impact of political risk on FDI exit decisions," Economic Systems, Elsevier, vol. 46(2).
    11. S. Veeramani & Abha Shukla & Mariam Jamaleh, 2020. "Financial theories of foreign direct investment: a review of literature," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 47(2), pages 185-217, June.
    12. Yameng Wang & Apurbo Sarkar & Linyan Ma & Qian Wu & Feng Wei, 2021. "Measurement of Investment Potential and Spatial Distribution of Arable Land among Countries within the “Belt and Road Initiative”," Agriculture, MDPI, vol. 11(9), pages 1-23, September.
    13. Sakli Hniya & Ahlem Boubker & Fatma Mrad & Sawssen Nafti, 2021. "The Impact of Real Exchange Rate Volatility on Foreign Direct Investment Inflows in Tunisia," International Journal of Economics and Financial Issues, Econjournals, vol. 11(5), pages 52-67.
    14. Lupton, Nathaniel C. & Baulkaran, Vishaal & No, Yeonji, 2022. "Subsidiary staffing, location choice, and shareholder rights effectiveness," Journal of Business Research, Elsevier, vol. 151(C), pages 222-231.
    15. Balaban, Suzana & Živkov, Dejan & Milenković, Ivan, 2019. "Impact of an unexplained component of real exchange rate volatility on FDI: Evidence from transition countries," Economic Systems, Elsevier, vol. 43(3).
    16. Vissa, Siva Kameswari & Thenmozhi, M., 2022. "What determines mergers and acquisitions in BRICS countries: Liquidity, exchange rate or innovation?," Research in International Business and Finance, Elsevier, vol. 61(C).

    More about this item

    Keywords

    Foreign direct investment; Multinational companies; Exchange rate volatility; Exchange rate expectation; Political environment;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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