Abstract

PurposeThe purpose of this paper is to investigate the impact of a menu of country‐pair exchange rate regime combinations upon bilateral foreign direct investment (FDI) flows.Design/methodology/approachThe authors use panel data from 27 OECD and non‐OECD high income countries for the period 1980 to 2003. Instrumental variable estimation of a dynamic panel model within a system generalised methods of moments framework allows us to control for both potential correlation issues and endogeneity bias.FindingsThis paper finds that a currency union is the policy framework most conducive to cross‐border investment. Being a member of EMU also appears to spur greater FDI flows with countries floating their currency vis‐à‐vis the default regime of a double‐float. Country‐pair regime combinations involving one country fixing its currency and the other floating or being a member of EMU, are found not to be more pro‐FDI than the default regime combination. For country‐pairs fixing or pegging their currency to each other, the effect on bilateral FDI flows is the least consistent across alternative specifications and, hence, the most ambiguous.Originality/valueThe contribution is also distinguished by the comparative use of recently developed “natural” or de facto exchange rate regime classification schemes, in addition to the de jure classification published by the IMF.

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call

Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.