Abstract
According to the theory of purchasing power parity (PPP), exchange-rate movements offset the effect of relative price changes on the terms of trade, thus serving as a stabilizing influence on an economy’s external position, protecting real variables from local shocks. In practice, however, exchange rates have deviated substantially and for lengthy periods from the rates implied by PPP, and in this case, exchange-rate movements, rather than serving to absorb real shocks (as in PPP), are a potential cause of shocks.1,2 An additional but separate issue of concern relates to the volatility of nominal and real exchange rates, a marked feature of recent experience of flexible exchange-rate regimes. Various studies have emerged exploring the impact of exchange-rate volatility (and associated uncertainty) on investment and growth (discussed further below). In this chapter we extend the literature, using an original database to explore the relationship between foreign direct investment and exchange-rate variability, with respect to both the level and volatility of exchange rates, for the case of the United Kingdom between 1997 and 2001.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsPreview
Unable to display preview. Download preview PDF.
References
Abel, A. (1983) ‘Optimal Investment under Uncertainty’, American Economic Review, vol. 73, pp. 228–33.
Aizenmann, J. (1992) ‘Exchange-Rate Flexibility, Volatility and the Patterns of Domestic and Foreign Direct Investment’, IMF Staff Papers, vol. 39(4), pp. 890–922.
Bailey, M. and G. Tavlas (1991) ‘Exchange Rate Variability and Direct Investment’, Annals of the American Academy of Political and Social Science, no. 516, pp. 106–16.
Bell, G. and J. Campa (1997) ‘Irreversible Investments and Volatile Markets: A Study of the Chemical Processing Industry’, Review of Economics and Statistics, vol. 79(1), pp. 79–87.
Campa, J. (1993) ‘Entry by Foreign Firms in the US under Exchange-Rate Uncertainty’, Review of Economics and Statistics, vol. 75(4), pp. 614–22.
Campa, J. M. and L. S. Goldberg (1995) ‘Investment in Manufacturing, Exchange-Rates and External Exposure’, Journal of International Economics, vol. 38, pp. 297–320.
Campa, J. M. and L. S. Goldberg (1999) ‘Investment, Pass-through and Exchange Rates: A Cross-country Comparison’, International Economic Review, vol. 40(2), pp. 287–313.
Carruth, A., A. Dickerson and A. nley (2000) ‘What Do We Know about Investment under Uncertainty’, Journal of Economic Surveys, vol. 14(2), pp. 119–53.
Cushman, D. (1985) ‘Real Exchange-Rate Risk, Expectations and the Level of Direct Investment’, Review of Economics and Statistics, vol. 67, pp. 302–7.
Cushman, D. (1988) ‘U.S. Bilateral Trade Flows and Exchange Risk during the Floating Period’, Journal of International Economics, vol. 24(3–4), pp. 317–30.
Darby, J., A. Hallett, J. Ireland and L. Piscitelli (1999) ‘The Impact of Exchange-rate Uncertainty on the Level of Investment’, Economic Journal, vol. 106, pp. C55–C67.
Dell’Ariccia, G. (1999) ‘Exchange Rate Fluctuations and Trade Flows: Evidence from the European Union’, IMF Staff Papers, vol. 46(3), pp. 315–34.
Dixit, A. and R. Pindyck (1994) Investment under Uncertainty (Princeton, NJ: Princeton University Press).
European Investment Monitor (London: Ernst & Young).
Froot, K. and K. Rogoff (1994) ‘Perspectives on PPP and Long-run Real Exchange Rates’, National Bureau of Economic Research, Working Paper no. 4952 (Cambridge, Mass: NBER).
Goldberg, L. (1993) ‘Exchange-Rates and Investment in US Industry’, Review of Economics and Statistics, vol. 75, pp. 575–88.
Goldberg, L. and C. Kolstad (1995) ‘FDI, Exchange-Rate Variability and Demand Uncertainty’, International Economic Review, vol. 36, pp. 855–73.
Greene, W. (2000) Econometric Analysis (Upper Saddle River, NJ: Prentice-Hall).
Itagaki, T. (1981) ‘The Theory of the MNF under Exchange-Rate Uncertainty’, Canadian Journal of Economics, vol. 14, pp. 276–97.
Kenen, P. and D. Rodrik (1986) ‘Measuring and Analysing the Effects of Short-Term Volatility in Real Exchange-Rates’, Review of Economics and Statistics, vol. 68, pp. 311–15.
Kogut, B. and N. Kulatilaka (1994) ‘Operating Flexibility, Global Manufacturing and the Option Value of a Multinational Network’, Management Science, vol. 40, pp. 123–39.
Kohlhagen, S. (1977) ‘The Effects of Exchange-Rate Adjustment on International Investment’, in P. Clark, D. Logue and R.J. Sweeney (eds), The Effects of Exchange-Rate Adjustments (Washington, DC: US Government Printing Office), pp. 194–7.
Peree, E. and A. Steinherr (1989) ‘Exchange-Rate Uncertainty and Foreign Trade’, European Economic Review, vol. 33, pp. 1241–64.
Roy, S. and J. M. Viaene (1998) ‘On Strategic Vertical Foreign Investment’, Journal of International Economics, vol. 4(2), pp. 253–79.
Sung, H. and H. Lapan (2000) ‘FDI and Exchange-Rate Uncertainty’, International Economic Review, vol. 41(2), pp. 411–23.
Tomlin, K. (1997) ‘The Effects of Model Specification on FDI Models: An Application of Count Data Models’, Southern Economic Journal, vol. 67(2), pp. 460–8.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Copyright information
© 2005 International Economic Association
About this chapter
Cite this chapter
Iannizzotto, M., Miller, N.J. (2005). The Effect of Exchange-rate Uncertainty on Foreign Direct Investment in the United Kingdom. In: Graham, E.M. (eds) Multinationals and Foreign Investment in Economic Development. International Economic Association Series. Palgrave Macmillan, London. https://doi.org/10.1057/9780230522954_8
Download citation
DOI: https://doi.org/10.1057/9780230522954_8
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-52564-5
Online ISBN: 978-0-230-52295-4
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)