Exchange rate volatility and foreign direct investment: do bilateral investment treaties matter?

This article attempts to investigate whether exchange rate volatility suppresses outward foreign direct investment and how to mitigate such adverse effects. Using OFDI data from six Asia Emerging Market Countries, the estimation results based on conditional logit model suggest that exchange rate volatility hinders firms of emerging market countries from investing in host countries. More importantly, we further demonstrate that bilateral investment treaties can mitigate such adverse effects of exchange rate volatility on FDI activities. Our results indicate that signing BITs with emerging market countries is beneficial to attracting FDI inflows, which is illuminating particularly when exchange rate volatilities are higher.