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Evidence on the impact of exchange rate regimes on bilateral FDI flows

Author

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  • Andrew J. Abbott
  • Glauco De Vita

Abstract

Purpose - The purpose of this paper is to investigate the impact of a menu of country‐pair exchange rate regime combinations upon bilateral foreign direct investment (FDI) flows. Design/methodology/approach - The authors use panel data from 27 OECD and non‐OECD high income countries for the period 1980 to 2003. Instrumental variable estimation of a dynamic panel model within a system generalised methods of moments framework allows us to control for both potential correlation issues and endogeneity bias. Findings - This paper finds that a currency union is the policy framework most conducive to cross‐border investment. Being a member of EMU also appears to spur greater FDI flows with countries floating their currencyvis‐à‐visthe default regime of a double‐float. Country‐pair regime combinations involving one country fixing its currency and the other floating or being a member of EMU, are found not to be more pro‐FDI than the default regime combination. For country‐pairs fixing or pegging their currency to each other, the effect on bilateral FDI flows is the least consistent across alternative specifications and, hence, the most ambiguous. Originality/value - The contribution is also distinguished by the comparative use of recently developed “natural” orde factoexchange rate regime classification schemes, in addition to thede jureclassification published by the IMF.

Suggested Citation

  • Andrew J. Abbott & Glauco De Vita, 2011. "Evidence on the impact of exchange rate regimes on bilateral FDI flows," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 38(3), pages 253-274, August.
    • Handle: RePEc:eme:jespps:v:38:y:2011:i:3:p:253-274
    DOI: 10.1108/01443581111152382
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    Citations

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    Cited by:

    1. Jung Wan Lee & Tantatape Brahmasrene, 2020. "Exchange Rate Movements and Structural Break on China FDI Inflows," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(2), June.
    2. Bashir Muhammad & Muhammad Kamran Khan, 2023. "Do Institutional Quality and Natural Resources Affect the Outward Foreign Direct Investment of G7 Countries?," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(1), pages 116-137, March.
    3. Patricia Lindelwa Makoni, 2020. "Foreign Portfolio Investments, Exchange Rates and Capital Openness: A Panel Data Approach," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 100-113.
    4. Okafor, Godwin & Piesse, Jenifer & Webster, Allan, 2015. "The motives for inward FDI into Sub-Saharan African countries," Journal of Policy Modeling, Elsevier, vol. 37(5), pages 875-890.
    5. 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.
    6. Manamba EPAPHRA & John MASSAWE, 2017. "The Effect of Corruption on Foreign Direct Investment: A Panel Data Study," Turkish Economic Review, KSP Journals, vol. 4(1), pages 19-54, March.
    7. Vo, Xuan Vinh & Nguyen, Dong Phong & Ho, Viet Tien & Nguyen, Trung Thong, 2017. "Where do the advanced countries invest? An investigation of capital flows from advanced countries to emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 51(C), pages 142-154.
    8. Cushman, David O. & De Vita, Glauco, 2017. "Exchange rate regimes and FDI in developing countries: A propensity score matching approach," Journal of International Money and Finance, Elsevier, vol. 77(C), pages 143-163.
    9. Guo, Yan, 2013. "Strategic trade policy, cost uncertainty and FDI determinants," ISU General Staff Papers 201301010800004464, Iowa State University, Department of Economics.
    10. Lucke, Bernd, 2022. "Growth Effects of European Monetary Union: A Synthetic Control Approach," MPRA Paper 115373, University Library of Munich, Germany.
    11. De Vita, Glauco, 2014. "The long-run impact of exchange rate regimes on international tourism flows," Tourism Management, Elsevier, vol. 45(C), pages 226-233.
    12. Chengchun Li & Yun Luo & Glauco Vita, 2020. "Institutional difference and outward FDI: evidence from China," Empirical Economics, Springer, vol. 58(4), pages 1837-1862, April.
    13. de Frutos, Pablo & Rodriguez-Prado, Beatriz & Latorre, Joaquín & Martinez-Peña, Fernando, 2019. "A Gravity Model to Explain Flows of Wild Edible Mushroom Picking. A Panel Data Analysis," Ecological Economics, Elsevier, vol. 156(C), pages 164-173.
    14. Ioannatos, Petros E., 2021. "Systematic growth asymmetry in the Eurozone? Evidence from a natural experiment," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    15. Akhil Sharma & Tarun Vashishat & Abdul Rishad, 2019. "The consequences of exchange rate trends on international tourism demand: evidence from India," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 21(2), pages 270-287, December.

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