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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|9462||2009||30 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : The Quarterly Review of Economics and Finance, Volume 49, Issue 2, May 2009, Pages 521–550
Analyzing inbound and outbound foreign direct investment (FDI) between the U.S. and seven developed countries over the period from 1994 to 2004, this study provides strong evidence for a positive relationship between aggregate FDI flows and a strengthening of a home currency. Further, taking exchange rate disequilibrium into account, we find that an increase in U.S. inbound FDI is related to a strengthening of an undervalued and overvalued U.S. dollar, while an increase in U.S. outbound FDI (foreign inbound FDI) is mainly related to a strengthening of an overvalued foreign currency. Disaggregate FDI flow data show that these findings hold mainly for the manufacturing (food and machinery) and the wholesale industry. We argue that our findings may provide evidence for a co-existence of the wealth-effect hypothesis and a more profit and production oriented hypothesis, once the U.S. dollar is undervalued. Additionally, the results support the argument that the profit and production oriented hypothesis dominates the wealth effect in developed countries, especially in the manufacturing and wholesale industry. Moreover, the results support the view that foreign investors are interested in how overvalued or undervalued a currency is, rather than being interested only in the recent direction of change in the exchange rate. Finally, all findings are robust with respect to several estimation procedures.
The globalization of capital markets accompanied by productivity and infrastructure improvements in developing countries seems to have shifted global allocations of foreign direct investments (FDI). For example, China's inbound FDI rose from $40.8 billion in 2000 to $52.7 billion in 2002. While over the same time span, U.S. inbound FDI decreased from $314 billion to $30 billion (UNCTAD World Investment Report, 2003). This downturn in U.S. FDI inflows, combined with the current depreciation of the U.S. dollar, has revitalized the discussion on the impact of the exchange rate on U.S. inbound FDI. The recent decline in U.S. inbound FDI is especially puzzling if one considers that, according to the wealth-effect hypothesis (Froot & Stein, 1991), a depreciating U.S. dollar makes U.S. assets cheaper for foreign investors. A depreciating currency, however, may not encourage foreign investments if the currency was previously overvalued. Foreigners may be hesitant to invest in this context, as the currency may be expected to depreciate further. This would impair the returns from any FDI in two ways: (1) domestic profits repatriated abroad will be converted at a less advantageous rate of exchange,3 and (2) the weakening of the currency may also increase the cost of production if the producer relies on intermediate goods imported from abroad. Consequently, we hypothesize in this paper that in addition to the strengthening or weakening of a currency, exchange rate disequilibrium (overvalued or undervalued currency) might be of importance with respect to FDI decisions. In this context, we argue that an undervalued currency, rather than a depreciating currency, may be related to the wealth effect. A depreciation of an overvalued home currency may prevent foreign investors from bidding for a domestic asset since such an investment may still be too expensive. An undervalued home currency, however, leaves domestic assets clearly at a bargain for foreign investors. Therefore, once a currency is undervalued, foreign investors might intensify their investment activities abroad due to the wealth effect (cheaper foreign assets). Additionally, if agents expect a revaluation of the currency, they may also benefit from higher future repatriated profits due to a more advantageous exchange rate and lower cost of production (profit and production oriented hypothesis). Hence, we hypothesize that an appreciating home currency might trigger an increase in FDI inflow, if the currency was previously undervalued, which we argue is in line with both the wealth-effect hypothesis and a more profit and production oriented hypothesis. Further, if the profit- and production-oriented effect dominates the wealth effect, which we hypothesize is the case for developed countries, then an appreciating overvalued home currency may still cause an increase of inbound FDI. Consequently, combining both above stated hypotheses, one should find for developed countries a positive relationship between a strengthening home currency and inbound FDI. The purpose of this study is to determine the extent to which deviations of the U.S. dollar spot rate from a relative purchasing power parity (PPP) equilibrium exchange rate may influence U.S. inbound and outbound FDI. Focusing on relative PPP-based equilibrium exchange rate misalignments rather than simply looking at the change in the exchange rate, as has been done in the majority of previous research in this area, bears the following advantages. First, using exchange rate misalignments allows us to investigate if overvaluation or undervaluation of the U.S. dollar matters in determining U.S. FDI flows. An overvalued (undervalued) U.S. dollar is defined as the positive (negative) difference between the actual spot exchange rate, in European terms, and several constructed equilibrium exchange rates, the construction of which is illustrated in Section 5. Second, and as mentioned by Hasnat (1998), misalignments are a more appropriate measure for long-term exchange rate movements. Third, whereas Hasnat's misalignments are constructed as the difference between the actual spot exchange rate and the average of the constructed PPP-based equilibrium exchange rates, the misalignments in this study follow the approach by Hakkio (1992) and take the fundamental path of the PPP-based equilibrium exchange rates into account. The study is carried out in a manner that controls for real GDP growth, corporate wealth, interest rates in the U.S. and the foreign countries, as well as, exchange rate volatility as a measure for currency risk. Using mainly quarterly data, sampled over the period 1994–2004, this study appears to be the first to investigate the impact of undervalued and overvalued bilateral spot exchange rates simultaneously on U.S. inbound and outbound FDI. We find the following: First, investigating solely the impact of a changing U.S. dollar on FDI flows, we find strong evidence for a positive relationship between aggregate FDI flows and a strengthening U.S. currency. Second, the positive relationship holds with respect to U.S. inbound and outbound FDI and is significant at a lag of two quarters. The findings seem to be in contrast to the conventional wisdom, documented in the literature, that a depreciating currency attracts FDI inflows (wealth-effect hypothesis) but in line with a more profit and production oriented hypothesis (Campa, 1993 and Goldberg, 1993). Third, taking the timing effect of the investment decision into account, we find that an increase in U.S. inbound FDI is primarily related to a strengthening of an undervalued U.S. dollar while an increase in U.S. outbound FDI is mainly related to a strengthening of an overvalued foreign currency. Consequently, our findings support the view that foreign investors are interested in how overvalued or undervalued a currency is, rather than being interested only in the recent direction of change in the exchange rate. Moreover, the finding for U.S. inbound FDI may provide the first evidence for a co-existence of the wealth-effect hypothesis (Froot & Stein, 1991) and a more profit and production oriented hypothesis (Campa, 1993 and Goldberg, 1993). This may be explained by the fact that an undervalued U.S. dollar leaves domestic assets still at a bargain for foreign investors, while the strengthening of the U.S. dollar promotes higher repatriated profits from the U.S. due to the more advantageous rate of exchange and lower cost of production if the producer relies on intermediate goods imported from abroad. Additionally, the positive effect between an overvalued currency and inbound FDI may provide evidence for our hypothesis that the profit- and production-oriented effect dominates the wealth effect in developed countries. Fourth, disaggregate FDI flow data show that these findings hold mainly for the manufacturing and the wholesale industry. Fifth, our results are robust with respect to several estimation procedures, as well as to the choice of different base periods and price indexes used to construct the equilibrium exchange rate. Finally, the findings do not change if one adjusts the consumer price index-based misalignments by productivity differentials. The remainder of the paper is organized as follows: Section 2 provides the literature review. Section 3 discusses the hypotheses analyzed in the paper. Section 4 describes the data used in the study. Section 5 explains the construction of the PPP-based equilibrium exchange rates. Section 6 discusses the model specification. Section 7 provides the results, and finally, Section 8 concludes the paper.
نتیجه گیری انگلیسی
Previous studies, which have investigated the impact of exchange rate movements on FDI flows, have left academicians and policy makers with inconclusive results. This study tries to improve the understanding of the relationships between exchange rates and U.S. inbound and outbound FDI. We utilize consumer price index-based misalignments that take the fundamental path of exchange rates into account. This bears the advantage that the effect of exchange rate overvaluation and undervaluation is included in the analysis. Controlling for exchange rate volatility, the previous quarter's FDI flows, changes in GDP, and interest rates across seven developed countries, strong evidence is found that, in contradiction to the traditional wealth effect, a strengthening home currency increases aggregate FDI inflows. We explain this finding by arguing that an undervalued currency rather than a depreciating currency should relate to the wealth effect, and, further, that the production- and profit-oriented effect dominates the wealth effect in developed countries. Furthermore, we provide novel evidence for a co-existence of the wealth effect and a production- and profit-oriented effect, as we find that a strengthening undervalued U.S. dollar causes an increase in U.S. inbound FDI. This finding may support the view that an undervalued currency triggers an increase in inbound FDI, and that the strengthening of a weaker currency provides foreign multinational companies with an opportunity of lower production costs due to the lower import costs of intermediate goods, as well as, higher repatriated returns from the FDI receiving country. Moreover, we find that the strengthening of an overvalued currency increases inbound FDI, which also supports our hypothesis that the production- and profit-oriented effect dominates that wealth effect in developed countries. Additionally, the results from the disaggregated FDI flow data suggest that, among our sample of developed countries, the production and profit oriented hypothesis holds particularly well for the manufacturing industry (especially for the food and machinery industry), and the wholesale industry. The results indicate that foreign investors are also interested in how overvalued or undervalued a currency is, rather than being interested only in the recent direction of change in the exchange rate. Moreover, the results may provide important information to multinational business managers and policy makers as they indicate that a stronger U.S. dollar attracts more FDI inflow. This might also be in line with recent experience of the U.S. with regard to FDI flows where the U.S. has experienced a contraction in U.S. inbound FDI despite a weak U.S. dollar.