An Empirical Analysis On The Relationship Between Developing Countries Outward FDI And Exchange Rate

An important aspect of economic globalization is the rapid growth of direct investment between various countries.However,in all literature regarding foreign direct investment(FDI),almost all researchers focus on outward FDI conducted by developed countries.According to UNCTAD,the share of developing countries in outward FDI can be expected to rise as firms in developing countries become more competitive and their government permit or even encourage outward FDI.To fully understand this phenomenon,scholars need to answer the questions such as why do firms in developing countries conduct foreign direct investments,are the incentives to conduct FDI the same as their counterparts from developed countries,what are the factors that would affect their investment decisions,et al.My focus here is how exchange rates would affect the outward FDI from developing countries.We first provide a thorough literature review regarding the factors that could affect outward FDI,with special emphasis on exchange rate level and exchange rate volatility.Next we briefly introduce the current status of outward FDI from developing countries,and then we investigate the motives of firms in developing countries which conduct outward FDI.We also explore the reasons why outward FDI from developing countries has experienced such rapid growth.We empirically examine the impact of the change in the exchange rate level (appreciation or depreciation) and volatility in the exchange rate on outward FDI from five developing countries(China,Russian,South Africa,Malaysia,Chile) for the period from 1994 to 2007.In our results,we find that the change in the exchange rate level and the exchange rate volatility are significant factors that would affect outward FDI from these five developing countries.Specifically,we find there is a positive relationship between outward FDI and appreciation in the home country currency.As regarding the volatility in the exchange rate,we find a negative relationship between outward FDI and exchange rate volatility.We also provide explanations for the empirical findings in our research.