GEP 11/14: Does Foreign Direct Investment Promote Economic Stability in Developing Countries?

Summary

For a large cross section of firms in developing countries I find that foreign investors are less affected by uncertainty as measured with exchange rate volatility on their investment decisions.

Abstract

Does foreign direct investment aid or hinder economic recovery ensuing a financial crisis? The paper tests the hypothesis that foreign direct investors are less affected by volatility (uncertainty) on their investment decisions. The data comes from the Business Enterprise and Economic Performance Surveys (BEEPS) collected by the World Bank. The investment data is applied using a Q model specification and sales growth data using a simple SCP model. The main finding is that foreign held firms are different from domestically held firms and especially domestically export active firms because of lower adjustment cost (which makes them continue to invest) during episodes of uncertainty.

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Authors

Camilla Jensen

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