Job Talk: EXCHANGE RATE REGIME CHOICE, SIGNALING AND FOREIGN DIRECT INVESTMENT (FDI) INFLOW IN DEVELOPING COUNTRIES

Li, Xiang Andrew

“EXCHANGE RATE REGIME CHOICE, SIGNALING AND FOREIGN DIRECT INVESTMENT (fdi) INFLOW IN DEVELOPING COUNTRIES”

Saturday, March 5, 9:00 am, MB 201

Abstract

This paper represents an effort to account for the choice of exchange rate regimes among developing countries in the post-Bretton Wood era. Recent research suggests that developing countries may have a different set of political economy dynamics behind the making of exchange rate policies from developed countries. For example, it has been found that more globalized developed countries tend to choose fixed exchange rate regimes while more globalized developing country tend to choose flexible regimes. I argue that in an era of globalization with capital mobility, governments of developing countries deliberately use a flexible exchange rate regime as a signal of their competitiveness to international investors. Due to the constraints placed by a flexible exchange rate regime on the policy instruments available to a government, such a regime is “costly” and therefore able to generate a separating equilibrium whereby it is only rational for the capable governments to send out the signal.

 The hypothesis is tested quantitatively using a panel of 110 developing countries and 20 developed countries from 1974 to 2004. To test the mediation effect of exchange rate regime, I follow the procedure suggested by Baron and Kenny for statistical mediation analysis. Overall, the empirical analysis shows that countries with greater economic stability tend to attract more FDI and such an effect is mediated by the choice of a flexible exchange rate regime. This mediation effect is only evident in the subsample of developing countries.

Biography 

Li, Xiang Andrew is Ph.D. Candidate (ABD) at the Department of Political Science, National University of Singapore and Department of Management, King’s College London. He is enrolled in the Joint Ph.D. Degree Program between the two institutes and is expected to complete the program in the summer of 2016. His research focuses on international political economy (with special attention to international finance and migration) and quantitative research methods. He has published in Economics & Politics, Journal of Xiamen University (Arts & Social Sciences) and Southeast Asian Affairs and served as the Managing Editor of International Studies Review from 2012 to 2013.