On the relationships among international trade, foreign direct investment, real exchange rate and its volatility: An empirical analysis

The relationships among international trade, foreign direct investment, real exchange rate and its volatility are analyzed in this dissertation. The study focuses on developing countries, using data during the floating exchange rate period (1974 to 1997).;The first chapter examines the long-run effects of the real exchange rate and its volatility on aggregate export volumes using data on thirteen developing countries. The multivariate restricted VAR is used to examine these effects. The analysis is applied to three measures of real exchange rate volatility, and the long-run multipliers are estimated. The results indicate that there is some evidence that real exchange rate depreciation has statistically significant positive long-run effects on exports. However, the results do not indicate that exports are strongly affected by real exchange rate volatility even in the long run.;The second chapter investigates the effects of the real exchange rate volatility on bilateral export trade patterns among thirteen countries, nine of which are developing countries. The panel data are used to examine the effects via the fixed-effects model. Each variable of each country is measured such that it is relative to the export share weighted average of that variable. The results indicate that there is some evidence, though limited, that real exchange rate volatility affects bilateral trade patterns such that an increase in relative bilateral volatility has led to exports shifting to relatively less risky markets.;The third chapter studies the effects of the real exchange rate on foreign direct investment (FDI) and whether FDI substitutes or complements international trade. The cross-section time series panel of annual trade and investment data for eight developing East Asian countries with respect to the United States and Japan are pooled together to examine these effects. The results indicate that the real exchange rate does affect direct investment flows and most of the trade-FDI relationships are complementary.