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Dynamic relationships between exchange rates and foreign direct investment : Empirical evidence from Korea

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  • Dynamic relationships between exchange rates and foreign direct investment
  • Lee, Jung Wan
  • The East Asian Economic Association


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Title Dynamic relationships between exchange rates and foreign direct investment
Similar Titles
Sub Title

Empirical evidence from Korea

Material Type Articles
Author(English)

Lee, Jung Wan

Publisher

[Nishinomiya]:The East Asian Economic Association

Date 2015
Journal Title; Vol./Issue Asian Economic Journal:Vol. 29(No. 1)
Subject Country South Korea(Asia and Pacific)
Language English
File Type Link
Subject Economy < Economic Administration
Economy < Economic System
Economy < Direct Investment
Holding EAEA

Abstract

This paper examines the short-run and long-run dynamic relationships between exchange rates and foreign direct investment (FDI) in Korea. Monthly data retrieved from the Bank of Korea from January 1999 to March 2012 are examined.A cointegration test, a vector error correction model, the Wald test and impulse responses techniques are applied to analyze the data. The present study finds that,first, long-run causation between exchange rates and FDI flows exists, which implies that a change in exchange rates negatively affects FDI flows in the long run.Second, short-run causation between exchange rates and FDI flows exists, which confirms that there is reciprocal feedback between the two variables. Finally, the study finds evidence of a structural break from the global financial crisis of 2007–2009 shock to FDI flows in Korea. An external shock affects changes in the endogenous variables and, thus, causes instability in the cointegrating vector in the system.