Free PDF Ebooks Files @AcrobatPlanet.Com

According to the theory of purchasing power parity, exchange-rate movements offset the effect of relative price changes on the terms of trade, thus serving as a stabilising influence on an economy’s external position, protecting real variables from local shocks. In practice, however, exchange-rates have deviated substantially and for lengthy periods from the rates implied by PPP, and in this case, exchange-rate movements, rather than serving to absorb real shocks (as in PPP), are potentially a cause of shocks23. An additional but separate issue of concern relates to the volatility of nominal and real exchange-rates, a marked feature of recent experience of flexible exchange-rate regimes. Various studies have emerged exploring the impact of exchange-rate volatility (and associated uncertainty) on investment and growth (discussed further below).

In this paper we extend the literature, using an original database to explore the relationship between foreign direct investment and exchange-rate variability, in respect of both the level and volatility of exchange-rates, for the case of the United Kingdom between 1997 and 2001. The case of the UK provides a particularly rich testbed for the theoretical predictions. As is well-known, between 1996 and 2000, the price of sterling against the Euro was subject to significant and sustained real appreciation (rising 25% at a time when inflation was higher in the UK than in countries of the Euro zone, and the UK had no external surplus). In addition, during this period, there has been considerable exchange-risk relative to Euro-competitor nations due to the UK’s non-participation in EMU, and the uncertainty over its willingness to join in the future. We examine the effect of these on FDI into According to the theory of purchasing power parity, exchange-rate movements offset the effect of relative price changes on the terms of trade, thus serving as a stabilising influence on an economy’s external position, protecting real variables from local shocks. In practice, however, exchange-rates have deviated substantially and for lengthy periods from the rates implied by PPP, and in this case, exchange-rate movements, rather than serving to absorb real shocks (as in PPP), are potentially a cause of shocks23.

An additional but separate issue of concern relates to the volatility of nominal and real exchange-rates, a marked feature of recent experience of flexible exchange-rate regimes. Various studies have emerged exploring the impact of exchange-rate volatility (and associated uncertainty) on investment and growth (discussed further below). In this paper we extend the literature, using an original database to explore the relationship between foreign direct investment and exchange-rate variability, in respect of both the level and volatility of exchange-rates, for the case of the United Kingdom between 1997 and 2001. The case of the UK provides a particularly rich testbed for the theoretical predictions. As is well-known, between 1996 and 2000, the price of sterling against the Euro was subject to significant and sustained real appreciation (rising 25% at a time when inflation was higher in the UK than in countries of the Euro zone, and the UK had no external surplus). In addition, during this period, there has been considerable exchange-risk relative to Euro-competitor nations due to the UK’s non-participation in EMU, and the uncertainty over its willingness to join in the future. We examine the effect of these on FDI into

Summarising our conclusions, we find that appreciation of sterling is strongly related to decline in FDI into the UK. There is some evidence that exchange-rate volatility has adversely affected FDI but much more work is required on this issue, particularly on defining and measuring appropriate measures of investors’ perceptions of exchange-rate uncertainty.

Download
PDF Ebook The Effect of Exchange Rate Uncertainty on Foreign Direct Investment in the United Kingdom