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Which Exchange Rates Matter for FDI? Evidence for Japan

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  • Benjamin N. Dennis
  • Christopher A. Laincz
  • Lei Zhu

Abstract

Using industry level data for Japanese foreign direct investment (FDI) flows to five Asian countries, we investigate how the sensitivity of FDI to the exchange rate changes across different industry types and exchange rate indices. Key results are as follows: (i) aggregated FDI data reported at the national level are insufficient for analysis, and industry‐level data are required; (ii) pooling industries by export orientation reveals heterogeneity in the response of different types of FDI to the exchange rates; and (iii) alternative exchange rate measures, particularly the competitor‐weighted exchange rate, perform better for export‐oriented FDI. We use our results to address key conflicts in the literature on exchange rates and FDI.

Suggested Citation

  • Benjamin N. Dennis & Christopher A. Laincz & Lei Zhu, 2008. "Which Exchange Rates Matter for FDI? Evidence for Japan," Southern Economic Journal, John Wiley & Sons, vol. 75(1), pages 50-68, July.
    • Handle: RePEc:wly:soecon:v:75:y:2008:i:1:p:50-68
    DOI: 10.1002/j.2325-8012.2008.tb00891.x
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