The effect of currency crises on foreign direct investment and foreign affiliate activity

This dissertation challenges the common perception that currency crises should have a negative effect on foreign direct investment (FDI) by formally examining the effect of currency crises on FDI activity. The first essay of this dissertation investigates the effect of currency crises on several measures of US outbound FDI in 65 countries covering the period from 1966 through 1992 and using different econometric specifications. Findings of this essay suggest that, contrary to the common perception, currency crises do not seem to have any negative effect on FDI activity in the host affected country. This is particularly true for less-developed countries (LDCs).;The second essay investigates the effect of currency crises on income of US affiliates in the affected economy. Findings of this essay suggest that the effect of currency crises on income of foreign affiliates is negative and more pronounced in industrial countries. In LDCs, however, this negative effect is less severe or even absent. Within country groups, the effect of currency crises on income of foreign affiliates is weaker in countries that have a long history of currency crises and in countries that attract more export-oriented FDI activity.;The third essay argues that following a currency crisis, foreign affiliates may be better off redirecting their sales to export markets. It formally tests this hypothesis using data on sales by US majority owned affiliates in 41 countries from 1983 through 1997. Findings of this essay support this argument and suggest that currency crises may lead to a 3 percentage point increase in the share of exports in total sales by foreign affiliates in LDCs in the year following the crises and the year after. In industrial countries, the magnitude of the effect is comparable but it only materializes after a two-year lag. Results also suggest that in LDCs the bulk of export surge is accounted for by the increase in intra-firm exports. The switching behavior is found to be true for countries where the share of exports to total sales is above the mean, suggesting that expertise, spillover, and learning by exporting issues really matter.