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Nominal and real volatility as determinants of FDI

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Abstract:

This article examines the role of country-specific sources of output and interest rate or exchange rate volatility in driving Foreign Direct Investment (FDI) activities. Building on a dataset with bilateral FDI flows among 24 Organization for Economic Co-operation and Development (OECD) economies over the period 1985–2007, we find that nominal and real volatility strongly deter foreign investments. Output and exchange rate volatility matter in particular for the decision whether to invest in a foreign country in the first place. Interest rate volatility mainly influences the amount of foreign investments.

Keywords: E22; F21; F42; FDI; business cycle; exchange rate volatility; interest rate volatility; output volatility

Document Type: Research Article

DOI: https://doi.org/10.1080/00036846.2012.674206

Affiliations: 1: DIPES, University of Rome 3, Via Chiabrera, 199 00145 Rome, Italy 2: Department of International Studies, University of Rome 3, Via G. Chiabrera, 199 I-00145 Rome, Italy

Publication date: 2013-06-01

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