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Evidence on how do different exchange rate regimes affect foreign direct investment flows?

This research paper investigates the effects of different exchange rate regimes on foreign direct investment (FDI) flows using panel data from 29 OECD and non-OECD countries from 1980 to 2003. The study draws from three different exchange rate regime classifications and controls for simultaneity bias and reverse causality. The results provide evidence on how various exchange rate regimes impact FDI flows.

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Evidence on how do different exchange rate regimes affect foreign direct investment flows?

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  1. Evidence on how do different exchange rate regimes affect foreign direct investment flows? Andrew J, Abbotta & Glauco De Vitab a University of Bath b Oxford Brookes University Business School Paper presented for the 7th INFER Workshop on International Economics, University of Murcia, Spain 28-29th March 2008  We gratefully acknowledge financial support by the Economic and Social Research Council (grant RES-000-22-2350).

  2. Evidence on how do different exchange rate regimes affect foreign direct investment flows? Andrew J, Abbotta & Glauco De Vitab a University of Bath b Oxford Brookes University Business School AIM To investigate the impact of different ER regimes upon FDI flows using panel data from 29 OECD & non-OECD countries for the period 1980-2003 and drawing from 3 different ER regime classifications.  We gratefully acknowledge financial support by the Economic and Social Research Council (grant RES-000-22-2350).

  3. Context • From 1980 to 2003, 600% increase in World FDI flows. • Much research on FDI determinants and its growth enhancing effects but no attention paid to ER regimes and FDI. • Striking given the voluminous literature on ER regimes and trade (rose, 2000 onwards) • Schiavo’s (2007, OEP) gravity model to investigate impact of EMU on FDI flows. OLS & Tobit results show that EMU has increased FDI flows by 160 to 320% (caution: EMU data 1999-2001).

  4. Our contribution • CUs are only 1 regime among feasible policy set. First set of estimates of effect of a wide menu of ER regimes on bilateral FDI flows between country-pairs (CU-CU; CU-FLT; CU-FIX; FIX-FIX; DFIX; FIX-FLT; and FLT-FLT) • Consider which ER regime the effect is benchmarked against. We compare specific effect of each regime combination vis-à-vis the more plausible alternative of a ‘double-float’ • In terms of the categorisation of ER regimes, comparative use of 3 different classifications: Reinhart and Rogoff (2004); Shambaugh (2004) and IMF (various issues of ERAR reports).

  5. Our contribution • In terms of the categorisation of ER regimes, comparative use of 3 different classifications: Reinhart and Rogoff (2004); Shambaugh (2004) and IMF (various issues of ERAR reports). • We explicitly control for simultaneity bias and reverse causality – instrumental variable estimation within SYS-GMM framework exploits time series variation while accounting for country specific effects

  6. Model • An unbalanced panel of 29 OECD and non-OECD countries over 1980-2003, yielding over 9,000 country-year observations across almost 400 country-pairs. • Drawing from standard variables typically entering the gravity equation, our parsimonious baseline model is expressed (in long-run form) as: • Where is the log of total bi-lateral real FDI flows between countries i and j at period t. Total FDI is the sum of inward and outward FDI flows, calculated from the OECD’s International Direct Investment Statistics database.

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