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The determinants of foreign direct investment (FDI) have been widely examined. Previous studies have shown that exchange rates play a vital role in the analysis and are a major determinant in the flow of FDI. Most research has focused on examining how exchange rate volatility affects the economies of developed nations. However, little research has been done in understanding the impact of exchange rate volatility on FDI flows to Latin America. Developing countries lack the capital that is needed for further growth. Therefore, FDI is important to developing countries, because it allows them to gain the necessary capital. This paper examines the relationship between exchange rate volatility, political institutions and FDI flows into Latin America across two sectors: food processing, and industrial manufacturing. Empirical results show that exchange rate volatility significantly deters the flow of U.S. FDI into Latin America. Other significant economic factors are U.S. interest rates and openness to trade. Conflict and corruption are the political risk factors that have significant impacts on FDI flows. Conclusions from the paper recommend governments in Latin America to implement macroeconomic polices that promote stability, which could help reduce exchange rate volatility and lower inflation.
Examine the changing nature of foreign investments in Latin America! Generously enhanced with easy-to-understand charts, tables, and graphs, this book covers the ins and outs of foreign direct investment in the established and emerging markets of Latin America. In addition to an overview of direct investment for the entire Latin American region in the 1990s, this valuable book examines specific countries’ experiences with FDI in that decade. These include Argentina, Chile, Mexico, Brazil, Peru, Ecuador, Paraguay, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. Spending on environmental projects is on the rise, and Latin American nations are at the forefront of this financial whirlwind in the developing world. Foreign Direct Investment in Latin America: Its Changing Nature at the Turn of the Century examines the difficulties of assessing environmental investments. It analyzes the role of international capital in Latin-American environmental issues and discusses the major players, such as the World Bank, in international capital and the environment. Foreign Direct Investment in Latin America presents case studies that illustrate: the history of FDI in Argentina and the impact of the privatization of state-owned enterprises in 1991-1993 the similarities and differences between 1990s FDI in Mexico and Chile the ways that modern investment in Brazil differs in purpose from investment there in previous economic eras how Peru addressed its balance-of-payments crisis in a time when its domestic financial markets were thin and there existed few sources of financing besides banks how Paraguay’s historical lack of infrastructure has hampered FDI efforts there Ecuador’s financial and balance-of-payments crisis-its currency is in free-fall and its financial institutions are on the brink of collapse . . . and much more! Foreign Direct Investment in Latin America packs all this valuable information into a single user-friendly source. As we move into the new millennium, no student, educator, or investor interested in this quickly evolving, volatile market should be without it!
During the last decade, Latin American countries have moved towards becoming more open and financially integrated. At the same time, the region has appeared to adopt a "bipolar" position concerning exchange rate regimes. Most countries have moved towards more flexible exchange rates, while others have implemented hard pegs in the form of dollarization. This dissertation has two goals. First, to measure linkages and dynamics across Latin American foreign exchange markets. Second, to explore how exchange rate uncertainty impacts U.S. foreign direct investment (FDI) into Latin America. In order to study interactions among these markets, I focus on the level of the currency and a measure of its volatility. I test for first and second order common features: common stochastic trends and common volatility. Evidence of common features in the foreign exchange markets has substantial implications. From a macroeconomic perspective, they indicate movements toward financial integration. From the point of view of investors, it has implications in terms of the assessment of risk and the development of hedging strategies. The existence of common stochastic trends is analyzed across countries, trade areas, and over different periods of time using Johansen (1991, 1995) and Gregory and Hansen (1996) cointegration tests. The existence of a common volatility process is tested using a factor autoregressive heteroscedastic (ARCH) model and the Engle and Kozicki (1993) methodology. The evidence suggests that most countries' currencies are cointegrated with the Brazilian real. This finding implies that the Brazilian real displays useful information about the long-run path of other currencies in the region. In terms of volatility dynamics, while most currencies display evidence of time-varying variance, the volatility movements in the foreign exchange market seems to be mainly country specific. Finally, I analyze the impact of exchange rate changes and exchange rate uncertainty on U.S. FDI inflows into Latin America. Following Engle and Lee (1999), exchange rate uncertainty is decomposed into a transitory and a permanent component. While controlling for other foreign investment determinants, the results indicate that exchange rate uncertainty appears to be detrimental to FDI inflows.
This paper analyzes the impact of exchange rate levels and exchange rate uncertainty on U.S. foreign direct investment into Latin America. By decomposing exchange rate uncertainty into temporary (short-run) and permanent (long-run) components, we further explore whether the nature of uncertainty matters. Our empirical findings support the view that exchange rate uncertainty has a negative impact on U.S. investment flows into Latin America. Moreover, it is the persistency in uncertainty rather than transitory uncertainty that mostly deters foreign investment. In contrast, investors do not appear to be affected by discrete movements in exchange rate levels.
Proceedings of the 11th International Forum on latin American Perspectives, which discussed the desirability of foreign direct investment over other flows, such as bank lending.