Dynamic Relationships between Exchange Rates and Foreign Direct Investment: Empirical Evidence from Korea

摘要

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.