Review of World Economics

, Volume 148, Issue 2, pp 269–295

Exchange rate volatility and first-time entry by multinational firms

Original Paper

Abstract

The model and related empirical examination in this paper demonstrate one reason why previous studies document both positive and negative correlations between exchange rate volatility and observed levels of foreign direct investment. Using a simple model of cross-border mergers and acquisitions, it argues that the source of the volatility is important in resolving the puzzle. An empirical analysis of mergers and acquisitions by individual firms reveal that first-time foreign direct investment is discouraged by monetary volatility originating from the source-country, but can be encouraged by monetary volatility originating in the host country, especially when compared to domestic investment or expansion by existing multinationals. The regressions also reveal a large and positive “euro effect” on the number of first-time cross-border mergers within the European Monetary Union, even when controlling for domestic merger activity.

Keywords

Exchange rate variability Foreign direct investment Uncertainty Mergers and acquisitions 

JEL Classifications

F1 F2 F4 

Copyright information

© Kiel Institute 2012

Authors and Affiliations

  1. 1.University of California, DavisDavisUSA

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