IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/43616.html
   My bibliography  Save this paper

Business cycle determinants of US foreign direct investments

Author

Listed:
  • Cavallari, Lilia
  • D'Addona, Stefano

Abstract

This paper investigates the role of output fluctuations and exchange rate volatility in driving US foreign direct investments (FDI). Using a sample of 46 economies over the period 1982-2009, we provide evidence of a positive relation between US FDI and host country’s cyclical conditions. Allowing for asymmetry over the business cycle, we find that the output elasticity of foreign investments is higher in booms than in recessions. An increase in exchange rate volatility, on the other hand, has a strong deterrent effect on US foreign investments. This effect is fairly stable over the business cycle.

Suggested Citation

  • Cavallari, Lilia & D'Addona, Stefano, 2012. "Business cycle determinants of US foreign direct investments," MPRA Paper 43616, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:43616
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/43616/1/MPRA_paper_43616.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Claudia M. Buch & Alexander Lipponer, 2005. "Business Cycles and FDI: Evidence from German Sectoral Data," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(4), pages 732-759, December.
    2. Simon Gilchrist & Jean-Olivier Hairault & Hubert Kempf, 2002. "Monetary policy and the financial accelerator in a monetary union," International Finance Discussion Papers 750, Board of Governors of the Federal Reserve System (U.S.).
    3. Levy Yeyati, Eduardo & Panizza, Ugo & Stein, Ernesto, 2007. "The cyclical nature of North-South FDI flows," Journal of International Money and Finance, Elsevier, vol. 26(1), pages 104-130, February.
    4. Bruce A. Blonigen & Jeremy Piger, 2019. "Determinants of Foreign Direct Investment," World Scientific Book Chapters, in: Foreign Direct Investment, chapter 1, pages 3-54, World Scientific Publishing Co. Pte. Ltd..
    5. Thomas A. Lubik & Katheryn N. Russ, 2012. "Exchange rate volatility in a simple model of firm entry and FDI," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 98(1Q), pages 51-76.
    6. Werner Holzl, 2005. "Tangible and intangible sunk costs and the entry and exit of firms in a small open economy: the case of Austria," Applied Economics, Taylor & Francis Journals, vol. 37(21), pages 2429-2443.
    7. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    8. Katheryn Russ, 2012. "Exchange rate volatility and first-time entry by multinational firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(2), pages 269-295, June.
    9. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    10. Goldberg, Linda S & Kolstad, Charles D, 1995. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 855-873, November.
    11. Kenneth A. Froot & Jeremy C. Stein, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1191-1217.
    12. Campa, Jose & Goldberg, Linda S., 1995. "Investment in manufacturing, exchange rates and external exposure," Journal of International Economics, Elsevier, vol. 38(3-4), pages 297-320, May.
    13. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
    14. repec:fip:fedreq:y:2012:i:1q:p:51-76:n:vol.98no.1 is not listed on IDEAS
    15. Miao Wang & M. C. Sunny Wong, 2007. "Foreign Direct Investment Outflows and Business‐cycle Fluctuations," Review of International Economics, Wiley Blackwell, vol. 15(1), pages 146-163, February.
    16. Cushman, David O, 1985. "Real Exchange Rate Risk, Expectations, and the Level of Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 297-308, May.
    17. Lilia Cavallari & Stefano d'Addona, 2013. "Nominal and real volatility as determinants of FDI," Applied Economics, Taylor & Francis Journals, vol. 45(18), pages 2603-2610, June.
    18. Cavallari Lilia, 2007. "A Macroeconomic Model of Entry with Exporters and Multinationals," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-32, September.
    19. repec:taf:applec:45:y:2013:i:18:p:2603-2610 is not listed on IDEAS
    20. Russ, Katheryn Niles, 2007. "The endogeneity of the exchange rate as a determinant of FDI: A model of entry and multinational firms," Journal of International Economics, Elsevier, vol. 71(2), pages 344-372, April.
    21. Assaf Razin & Efraim Sadka, 2007. "Introduction to Foreign Direct Investment: Analysis of Aggregate Flows," Introductory Chapters, in: Foreign Direct Investment: Analysis of Aggregate Flows, Princeton University Press.
    22. Stevens, Guy V. G., 1998. "Exchange Rates and Foreign Direct Investment: A Note," Journal of Policy Modeling, Elsevier, vol. 20(3), pages 393-401, June.
    23. Ester Faia, 2010. "Financial Frictions And The Choice Of Exchange Rate Regimes," Economic Inquiry, Western Economic Association International, vol. 48(4), pages 965-982, October.
    24. Campa, Joe Manuel, 1993. "Entry by Foreign Firms in the United States under Exchange Rate Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 614-622, November.
    25. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-116, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. KARGI, Bilal, 2014. "Portfolio in Turkish Economy, and A Long Termed Relation Between Foreign Direct Investments and The Growth, and The Structural Breakage Analysis (1980-2012)," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 6(1), pages 70-81.
    2. Works, Richard Floyd, 2016. "Econometric modeling of exchange rate determinants by market classification: An empirical analysis of Japan and South Korea using the sticky-price monetary theory," MPRA Paper 76382, University Library of Munich, Germany.
    3. K. S. Sujit & B. Rajesh Kumar & Sarbjit Singh Oberoi, 2020. "Impact of Macroeconomic, Governance and Risk Factors on FDI Intensity—An Empirical Analysis," JRFM, MDPI, vol. 13(12), pages 1-14, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Shi Li & Hironobu Nakagawa, 2022. "Exchange rates and foreign direct investment: Evidence from Chinese firm‐level data," The World Economy, Wiley Blackwell, vol. 45(9), pages 2902-2923, September.
    2. Shauna Phillips & Fredoun Z. Ahmadi-Esfahani, 2008. "Exchange rates and foreign direct investment: theoretical models and empirical evidence ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(4), pages 505-525, December.
    3. Matthias Busse & Carsten Hefeker & Signe Nelgen, 2013. "Foreign Direct Investment and Exchange Rate Regimes," Economics Bulletin, AccessEcon, vol. 33(1), pages 843-858.
    4. Phillips, Shauna & Ahmadi-Esfahani, Fredoun Z., 2008. "Exchange Rates and Foreign Direct Investment: Theoretical Models and Empirical Evidence," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(4), pages 1-21.
    5. Sangyup Choi & Davide Furceri & Chansik Yoon, 2019. "Policy Uncertainty and FDI Flows: The Role of Institutional Quality and Financial Development," Working papers 2019rwp-144, Yonsei University, Yonsei Economics Research Institute.
    6. Manop Udomkerdmongkol & Holger Görg & Oliver Morrissey, 2006. "Foreign Direct Investment And Exchange Rates: A Case Study Of U.S. Fdi In Emerging Market Countries," Discussion Papers 06/05, University of Nottingham, School of Economics.
    7. Lewis, Logan T., 2014. "Exports versus multinational production under nominal uncertainty," Journal of International Economics, Elsevier, vol. 94(2), pages 371-386.
    8. Guo, Yan, 2013. "Strategic trade policy, cost uncertainty and FDI determinants," ISU General Staff Papers 201301010800004464, Iowa State University, Department of Economics.
    9. Carlos Rodríguez & Ricardo Bustillo, 2015. "Foreign Direct Investment and the Business Cycle: New Insights after the Great Recession," Prague Economic Papers, Prague University of Economics and Business, vol. 2015(2), pages 136-153.
    10. Shi, Jiao, 2019. "Vertical FDI and exchange rates over the business cycle: The welfare implications of openness to FDI," Journal of Development Economics, Elsevier, vol. 138(C), pages 274-293.
    11. Cavallari, Lilia, 2013. "Firms' entry, monetary policy and the international business cycle," Journal of International Economics, Elsevier, vol. 91(2), pages 263-274.
    12. Burçak Polat & Cem Payaslıoğlu, 2016. "Exchange rate uncertainty and FDI inflows: the case of Turkey," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 23(1), pages 112-129, March.
    13. Alali, Walid Y. & Ellalee, Haider, 2018. "The Brexit Impact on Inward FDI in the UK," EconStor Preprints 274655, ZBW - Leibniz Information Centre for Economics.
    14. Manop Udomkerdmongkol & Oliver Morrissey & Holger Görg, 2009. "Exchange Rates and Outward Foreign Direct Investment: US FDI in Emerging Economies," Review of Development Economics, Wiley Blackwell, vol. 13(4), pages 754-764, November.
    15. Osei-Fosu & Baba Insah Anthony & Ofori-Boateng Kenneth, 2015. "Real Exchange Rate Volatility and Foreign Direct Investment Inflows: The Ghanaian Experience," International Journal of Empirical Finance, Research Academy of Social Sciences, vol. 4(6), pages 336-344.
    16. Russ, Katheryn, 2004. "The Endogeneity of the Exchange Rate as a Determinant of FDI: A Model of Money, Entry, and Multinational Firms," Santa Cruz Department of Economics, Working Paper Series qt9xr4f238, Department of Economics, UC Santa Cruz.
    17. Katheryn Russ, 2012. "Exchange rate volatility and first-time entry by multinational firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(2), pages 269-295, June.
    18. Russ, Katheryn Niles, 2007. "The endogeneity of the exchange rate as a determinant of FDI: A model of entry and multinational firms," Journal of International Economics, Elsevier, vol. 71(2), pages 344-372, April.
    19. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
    20. Mariam Camarero & Laura Montolio & Cecilio Tamarit, 2020. "Determinants of FDI for Spanish regions: evidence using stock data," Empirical Economics, Springer, vol. 59(6), pages 2779-2820, December.

    More about this item

    Keywords

    FDI; business cycle; cyclical output; exchange rate volatility;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:43616. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.