Asymmetric effect of real exchange rate risk on foreign direct investment: Empirical evidence in ASEAN-4
Main Article Content
Article Sidebar
Mori Kogid
Dullah Mulok Rozilee Asid
Abstract
This study investigates the asymmetric effect of exchange rate risk (volatility) on the real foreign direct investment (FDI) inflows in Malaysia, the Philippines, Singapore, and Thailand (ASEAN-4) using the Nonlinear Autoregressive Distributed Lag (NARDL) model. The results revealed the occurrence of a long-run asymmetric cointegration between real FDI inflows and real exchange rate risk in the Philippines, Singapore, and Thailand, but not in Malaysia. For the Philippines and Singapore, there is evidence of long-run asymmetry whereas short-run asymmetry exists for the case of Thailand. These findings imply that the asymmetric effects prove to be useful in providing essential information to the related parties on how FDI inflows react to exchange rate risks differently. Therefore, policymakers in ASEAN countries should be concerned about the asymmetric effect of the exchange rate volatility to mitigate the stylized effects of exchange rate movements on FDI inflows.
How to Cite
Article Details
Asymmetric Effect, Real Exchange Rate Risk, NARDL, FDI, ASEAN-4, Foreign Direct Investment

This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Al-Abri, A., & Baghestani, H. (2015). Foreign investment and real exchange rate volatility in emerging Asian countries. Journal of Asian Economics, 37, 34–47. https://doi.org/10.1016/j.asieco.2015.01.005
Albuquerque, R., Loayza, N., & Servén, L. (2005). World market integration through the lens of foreign direct investors. Journal of International Economics, 66(2), 267–295. https://doi.org/10.1016/j.jinteco.2004.07.002
Bahmani-Oskooee, M., & Hajilee, M. (2013). Exchange rate volatility and its impact on domestic investment. Research in Economics, 67(1), 1–12. https://doi.org/10.1016/j.rie.2012.08.002
Barrell, R., Gottschalk, S. D., & Hall, S. G. (2007). Foreign direct investment (FDI) and exchange rate uncertainty in imperfectly competitive industries. In G. M. Korres (Ed.), Regionalisation, Growth, and Economic Integration Contributions to Economics (pp. 77–99). Physica-Verlag Heidelberg. https://doi.org/10.1007/978-3-7908-1925-0-5
Bénassy-Quéré, A., Fontagné, L., & LahrÈche-Révil, A. (2001). Exchange-Rate strategies in the competition for attracting Foreign Direct Investment. Journal of the Japanese and International Economies, 15(2), 178–198. https://doi.org/10.1006/jjie.2001.0472
Blonigen, B. A., & Piger, J. (2014). Determinants of Foreign Direct Investment. The Canadian Journal of Economics, 47(3), 775–812. https://doi.org/10.1002/tie.4270400306
Bollerslev, T. (1986). Generalized Autoregressive Conditional Heteroskedasticity. Journal of Econometrics, 31, 307–327. http://ieeexplore.ieee.org/document/4359202/
Campa, J. M. (1993). Entry by foreign firms in the United States under exchange rate uncertainty. The Review of Economics and Statistics, 75(4), 614. https://doi.org/10.2307/2110014
Chen, K. M., Rau, H. H., & Lin, C. C. (2006). The impact of exchange rate movements on foreign direct investment: Market-oriented versus cost-oriented. Developing Economies, 44, 269–287. https://doi.org/10.1111/j.1746-1049.2006.00017.x
Choi, J. J., Jeon, B. N., Jay, J., & Nam, B. (2007). Financial factors in foreign direct investments: A dynamic analysis of international data. Research in International Business and Finance, 21(1), 1–18. https://doi.org/10.1016/j.ribaf.2005.08.003
Chong, L.-L., & Tan, H.-B. (2008). Exchange rate risk and macroeconomic fundamentals: Evidence from four neighboring Southeast Asian economies. International Research Journal of Finance and Economics, 16, 88–95.
Chowdhury, A. R., & Wheeler, M. (2008). Does real exchange rate volatility affect foreign direct investment? Evidence from four developed economies. The International Trade Journal, 22(2), 218–245. https://doi.org/10.1080/08853900801970601
Darby, J., Hallett, A. H., Ireland, J., & Piscitelli, L. (1999). The impact of exchange rate uncertainty on the level of investment. Economic Journal, 109(454), 55–67. https://doi.org/10.1111/1468-0297.00416
Delatte, A.-L., & López-Villavicencio, A. (2012). Asymmetric exchange rate pass-through: Evidence from major countries. Journal of Macroeconomics, 34(3), 833–844. https://doi.org/10.1016/j.jmacro.2012.03.003
Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366), 427–431. https://doi.org/10.2307/2286348
El bejaoui, H. J. (2013). Asymmetric effects of exchange rate variations: An empirical analysis for four advanced countries. International Economics, 135–136, 29–46. https://doi.org/10.1016/j.inteco.2013.10.001
Ellahi, N. (2011). Exchange rate volatility and foreign direct investment (FDI) behavior in Pakistan: A time series analysis with autoregressive distributed lag (ARDL) application. African Journal of Business Management, 5(29), 11656–11661. https://doi.org/10.5897/AJBM11.1676
Glosten, L. R., Jagannathan, R., & Runkle, D. E. (1993). On the relation between the expected value and the volatility of the nominal excess return on stocks. The Journal of Finance, 48(5), 1779. https://doi.org/10.2307/2329067
Goldberg, L. S., & Kolstad, C. D. (1995). Foreign direct investment, exchange rate variability, and demand uncertainty. International Economic Review, 36(4), 855. https://doi.org/10.2307/2527262
Gorg, H., & Wakelin, K. (2002). The impact of exchange rate volatility on US direct investment. The Manchester School, 70(3), 380–397. https://doi.org/10.1111/1467-9957.00308
Gottschalk, S., & Hall, S. (2008). Foreign direct investment and exchange rate uncertainty in South-East Asia. International Journal of Finance & Economics, 13, 349–359. https://doi.org/http://dx.doi.org/10.1002/ijfe.355
Groh, A. P., & Wich, M. (2012). Emerging economies' attraction for foreign direct investment. Emerging Markets Review, 13(2), 210–229. https://doi.org/10.1016/j.ememar.2012.03.005
Hakro, A., & Ghumro, I. (2011). Determinants of foreign direct investment flow to Pakistan. The Journal of Developing Areas, 44(2), 217–242. http://muse.jhu.edu/journals/jda/summary/v044/44.2.hakro.html
Hara, M., & Razafimahefa, I. F. (2005). The determinants of foreign direct investments into Japan. Kobe University Economic Review, 51, 21–34. http://www.lib.kobe-u.ac.jp/repository/00422140.pdf
Ibrahim, M. H. (2015). Oil and food prices in Malaysia: a nonlinear ARDL analysis. Agricultural and Food Economics, 3(1), 1–14. https://doi.org/10.1186/s40100-014-0020-3
Iorio, A. Di, Faff, R., Di Iorio, A., & Faff, R. (2000). An analysis of asymmetry in foreign currency exposure of the Australian equities market. Journal of Multinational Financial Management, 10(2), 133–159. https://doi.org/10.1016/S1042-444X(99)00024-9
Jongwanich, J., & Kohpaiboon, A. (2013). Capital flows and real exchange rates in emerging Asian countries. Journal of Asian Economics, 24(October 2010), 138–146. https://doi.org/10.1016/j.asieco.2012.10.006
Kandilov, I. T., & Leblebicio?lu, A. (2011). The impact of exchange rate volatility on plant-level investment: Evidence from Colombia. Journal of Development Economics, 94(2), 220–230. https://doi.org/10.1016/j.jdeveco.2010.01.013
Kiyota, K., & Urata, S. (2004). Exchange Rate, Exchange Rate Volatility, and Foreign Direct Investment. The World Economy, 27(10), 1501–1536. https://doi.org/http://www.blackwellpublishing.com/journal.asp?ref=0378-5920
Koutmos, G., & Martin, A. D. (2003). Asymmetric exchange rate exposure: theory and evidence. Journal of International Money and Finance, 22(3), 365–383. https://doi.org/10.1016/S0261-5606(03)00012-3
Koutmos, G., & Martin, A. D. (2007). Modeling time variation and asymmetry in foreign exchange exposure. Journal of Multinational Financial Management, 17(1), 61–74. https://doi.org/10.1016/j.mulfin.2006.03.004
Lily, J., Kogid, M., Mulok, D., Lim, T. S., & Asid, R. (2014). Exchange rate movement and foreign direct investment in ASEAN economies. Economics Research International, 2014, 1–10. https://doi.org/10.1155/2014/320949
Lin, C.-H. (2011). Exchange rate exposure in the Asian emerging markets. Journal of Multinational Financial Management, 21(4), 224–238. https://doi.org/10.1016/j.mulfin.2011.04.002
Maria, G., Menla, F., Spagnolo, F., & Spagnolo, N. (2017). International portfolio flows and exchange rate volatility in emerging Asian markets. Journal of International Money and Finance, 76, 1–15. https://doi.org/10.1016/j.jimonfin.2017.03.002
Markusen, J. R. (1995). The boundaries of multinational enterprises and the theory of international trade. The Journal of Economic Perspectives, 9(2), 169–189.
McKenzie, M. (2002). The economics of exchange rate volatility asymmetry. International Journal of Finance and Economics, 7(3), 247–260.
Moosa, I. A. (2002). Foreign Direct Investment: Theory, Evidence, and Practice. Palgrave.
Muller, A., & Verschoor, W. F. C. (2006). Asymmetric foreign exchange risk exposure: Evidence from U.S. multinational firms. Journal of Empirical Finance, 13(4–5), 495–518. https://doi.org/10.1016/j.jempfin.2006.01.003
Narayan, P. K. (2005). The saving and investment nexus for China: Evidence from cointegration tests. Applied Economics, 37(17), 1979–1990. https://doi.org/10.1080/00036840500278103
Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica, 59, 347–370. https://doi.org/10.2307/2938260
Osinubi, T. S., & Amaghionyeodiwe, L. A. (2009). Foreign direct investment and exchange rate volatility in Nigeria. International Journal of Applied Econometrics and Quantitative Studies, 6(2), 83–116.
Pain, N., & Van Welsum, D. (2003). Untying the Gordian Knot: The multiple links between exchange rates and foreign direct investment. Journal of Common Market Studies, 41(5), 823–846. https://doi.org/10.1111/j.1468-5965.2003.00465.x
Parsley, D. C., & Popper, H. A. (2006). Exchange rate pegs and foreign exchange exposure in East and South East Asia. Journal of International Money and Finance, 25(6), 992–1009. https://doi.org/10.1016/j.jimonfin.2006.07.009
Patnaik, I., Shah, A., Sethy, A., & Balasubramaniam, V. (2011). The exchange rate regime in Asia: From crisis to crisis. International Review of Economics & Finance, 20(1), 32. https://doi.org/10.1016/j.iref.2010.07.004
Perron, P. (1988). Trends and random walks in macroeconomic time series: Further evidence from a new approach. Journal of Economic Dynamics and Control, 12(2), 297–332.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289–326. https://doi.org/10.1002/jae.616
Phillips, P. (1987). Towards a unified asymptotic theory for autoregression. Biometrika, 74(3), 535–547. https://doi.org/10.1093/biomet/74.3.535
Phillips, P., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75, 335–346. https://doi.org/10.1093/biomet/75.2.335
Schmidt, C. W., & Broll, U. (2009). Real exchange-rate uncertainty and US foreign direct investment: An empirical analysis. Review of World Economics, 145(3), 513–530. https://doi.org/10.1007/s10290-009-0024-3
Sekmen, F. (2007). Cointegration and causality among foreign direct investment in the tourism sector, GDP, and exchange rate volatility in Turkey. The Empirical Economics Letters, 6(1), 53–58.
Sharifi-Renani, H., & Mirfatah, M. (2012). The impact of exchange rate volatility on foreign direct investment in Iran. Procedia Economics and Finance, 1(12), 365–373. https://doi.org/10.1016/S2212-5671(12)00042-1
Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modeling asymmetric cointegration and dynamic multipliers in a Nonlinear ARDL framework. In R. C. Sickles & W. C. Horrace (Eds.), Festschrift in Honor of Peter Schmidt (pp. 281–314). Springer New York. https://doi.org/10.1007/978-1-4899-8008-3_9
Stevens, G. V. (1998). Exchange Rates and Foreign Direct Investment. Journal of Policy Modeling, 20(3), 393–401. https://doi.org/10.1016/S0161-8938(97)00007-0
Suardi, S. (2008). Central bank intervention, threshold effects, and asymmetric volatility: Evidence from the Japanese yen-US dollar foreign exchange market. Economic Modelling, 25(4), 628–642. https://doi.org/10.1016/j.econmod.2007.10.002
Takagi, S., & Shi, Z. (2011). Exchange rate movements and foreign direct investment (FDI): Japanese investment in Asia, 1987-2008. Japan and the World Economy, 23(4), 265–272. https://doi.org/10.1016/j.japwor.2011.08.001
Tan, H.-B., & Chong, L.-L. (2008). Choice of exchange rate system and macroeconomic volatility of three Asian emerging economies. Macroeconomics and Finance in Emerging Market Economies, 1(2), 167–179. https://doi.org/10.1080/17520840802252217
Xing, Y., & Wan, G. (2006). Exchange rates and competition for FDI in Asia. The World Economy, 29(4), 419–434. https://doi.org/10.1111/j.1467-9701.2006.00791.x
Zakoian, J. M. (1994). Threshold heteroskedastic models. Journal of Economic Dynamics and Control, 18(5), 931–955. https://doi.org/10.1016/0165-1889(94)90039-6