Exchange rates and FDI strategies of multinational enterprises

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Title Exchange rates and FDI strategies of multinational enterprises
Author Lee, Bong-Soo; Min, Byung-Seong
Journal Name Pacific-Basin Finance Journal
Editor C.Cao, J-K Kang, S.G. Rhee
Year Published 2011
Place of publication Netherlands
Publisher Elsevier BV
Abstract We examine the role of both the volatility and levels of exchange rates in the determination of multinational enterprises’ (MNEs) investments using a unique Korean dataset. These data provide a natural laboratory due to the Korean experience of a severe financial crisis in the late nineties. We find, first, that the behavior of foreign investors in Korea has changed following the 1997 crisis. The change in foreign direct investment (FDI) in response to exchange rate volatility is robust, while that to exchange rate level is quite mixed, which is consistent with recently developed real option-based FDI theory. Second, the effect of exchange rate volatility on FDI is persistent, whereas that of misalignment of level is only temporary, suggesting that MNEs regard volatility as a more generic determinant of foreign investment than misalignment of the exchange rate level. Third, we find strong evidence of nonlinearity between uncertainty and FDI, which may shed some light on why existing literature shows mixed results on the relation between exchange rate variables and FDI.
Peer Reviewed Yes
Published Yes
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Copyright Statement Copyright 2011 Elsevier. This is the author-manuscript version of this paper. Reproduced in accordance with the copyright policy of the publisher. Please refer to the journal's website for access to the definitive, published version.
Volume 19
Issue Number 5
Page from 586
Page to 603
ISSN 0927-538X
Date Accessioned 2011-09-30
Language en_US
Faculty Griffith Business School
Subject PRE2009-Finance Economics
Publication Type Journal Articles (Refereed Article)
Publication Type Code c1

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