Sunday, June 14, 2020
The main purpose of this paper is to find out the impact of Inter Bank Exchange Rate on Foreign Direct Investment Inflow in Pakistan. To determine the impact of Inter Bank Exchange Rate on Foreign Direct Investment Inflow two variables are to be selected that are Inter Bank Exchange Rate and Foreign Direct Investment Inflow. To test the hypothesis that Inter Bank Exchange Rate has a positive impact on Foreign Direct Investment Inflow in Pakistan. Regression Analysis technique is to be used. This research study will show the positive impact of Inter Bank Exchange Rate on Foreign Direct Investment Inflow in Pakistan. Sample data of last 19 years is to be taken to test the hypothesis. The main purpose of this research study is to find out relationship between Inter Bank Exchange Rate and Foreign Direct Investment Inflow in Pakistan. This research study will show the positive impact of Inter Bank Exchange Rate on Foreign Direct Investment Inflow in Pakistan. This research study will help investors in Pakistan to see that Pakistan is a growing market and it has potential for Investments. That investments will yield more profits. The international business literature, on the other hand, has in general observed that a devaluation by the source country will in fact make foreign investment less attractive, while a devaluation by the host country will make expansion of already existing foreign subsidiaries more profitable (Dufey). For example, Japanese experts often cite the early 1970s yen revaluations as a main reason for the expected surge in Japanese foreign investment (Litvak and Maule and Sherk). Makin has concluded that the 1960s view of the United States as a permanent capital exporter and (say) Germany and Japan as permanent capital importers may have been incorrect. He notes that the observed direction of flows could have been due to disequilibrium exchange rates a flow that would then be slowed or reversed by recent yen and mark upward revaluations and the dollar devaluation. This effect was also predicted much earlier by Houthakker. In keeping with this view, the modern theory of FDI since Hymer (1960), Kindleberger (1969), and Vernon (1966) stresses that FDI occurs not because of cost-of-capital differences but because certain domestic assets are worth more under foreign control. Klein and Rosengren find that, even after controlling for relative wages, a 1 percent increase in the foreign currency value of foreign stocks has roughly the same (statistically significant) impact on U. S. FDI inflows as a 1 percent depreciation of the dollar. In the last decade there has been an increasing interest in the link between foreign direct investment (FDI) and exchange rates. Two models, Cushman (1985) and Froot and Stein (1991), discuss the factors that might lead to a correlation between the value of the dollar and the level of foreign investment in the United States. Harris and Ravenscraft (1991), and Swenson (1993), have provided evidence that a depreciating dollar is associated with both higher flows of FDI into the United States and higher foreign takeover premia. Expected exchange rate changes can affect various aspects of the investment decision, including the timing of decisions (Kohlhagen 1977) and debt denomination (Cushman 1985). Cushman (1985) and Froot and Stein (1991) explore the factors that might contribute to correlation between the external value of the dollar and the level of foreign investment in the U.S. They have found that modeling a link between FDI and exchange rates would require some beliefs in the long-run and short-run deviation from PPP on the cross-border investment process. There is also a counter-argument that changes in exchange rates also affect the value of foreign direct investment (Lee and Sullivan 1995). The currency area theory, advanced by Aliber (1970) and Heller (1981), argues that a strong currency causes outflows of foreign direct investment and a weak currency causes its inflows. Thus, the corporation obtains a higher expected profit than it would have if it had not diversified internationally by foreign direct investment Grubel (1988). This argument suggests a positive correlation between real exchange rate flexibility and foreign direct investment. Bailey and Tavlas (1991) showed that exchange-rate risk has an ambiguous effect on the FDI of a risk-averse firm. Kindleberger (1969) argued that in order for direct investment to exist, there must also be market imperfections or government intervention. Otherwise, individual economies would produce only those goods and services for which they had a comparative advantage, and other goods would be provided through trade. Exchange rate fluctuations may also create incentives for foreign direct investment, as multinationals stabilize profits by spreading exchange rate risk across countries (Rugman, 1979). Inflows of foreign investment can modernise and expand the stock of physical and human capital in the economy, helping to fill what Romer (1993) termed object gaps. LITERATURE REVIEW Article Number 1: Exchange Rate Changes, Profitability, and Direct Foreign Investment. This research study has been conducted by Steven W. Kohlhagen. The main purpose of this paper is to measure the major European exchange rate changes of the 1960s effected U.S. foreign direct investment. To conduct this research study data has been taken from tabulated data appearing yearly in the summary article in the survey of current business. The data collected for this research study was taken from the year 1957 till 1973. The results of the effects on U.S. Foreign investment of dummy variables representing all four parity changes are presented in research paper. The set of the four exchange rate changes taken together significantly explain total U.S. Foreign direct investment and U.S. Foreign direct investment in Europe and the EEC. In all three cases the coefficient has the expected positive sign and is significant. Article Number 2: Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach. This research study has been conducted by Kenneth A. Froot and Jeremy C. Stein. The main purpose of this paper is to examine the connection between exchange rates and foreign direct investment that arises when globally integrated capital markets are subject to informational imperfections. These imperfections cause external financing to be more expensive than internal financing, so that changes in wealth translate into changes in the demand for direct investment. By systematically lowering the relative wealth of domestic agents, a depreciation of the domestic currency can lead to foreign acquisitions of certain domestic assets. We develop a simple model of this phenomenon and test for its relevance in determining international capital flows. A simple model in which relative wealth-and therefore the exchange rate has a systematic effect on FDI. Furthermore, additional support for our model over competing alternatives comes from the finding that shocks to wealth other than the exchange rate also help to explain U. S. FDI inflows. Article Number 3: Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty. This research study has been conducted by Linda S. Goldberg and Charles D. Kolstad. The main purpose of this paper is to emphasizes and explore the implications of short-term exchange rate variability for foreign direct investment (FDI) flows. Exchange rate variability had a positive and statistically significant effect on four of the six bilateral FDI shares: real exchange rate variability increased the share of total U.S. Investment capacity located in Canada and in Japan, and increased the share of Canadian and United Kingdom investment located in the United States. Article Number 4: Do Exchange Rate Changes Drive Foreign Direct Investment? This research study has been conducted by Kathryn L. Dewenter. This paper examines the robustness of prior test results with respect to the foreign investment measure, the exchange rate measure, and inclusion of a relative wealth proxy. This article has used a new transaction-specific data set to systematically explore the relationship between the value of the dollar, cross border acquisition flows, and takeover premia. The results confirm prior findings that a depreciating U.S. Dollar is associated with higher levels of foreign acquisitions into the United States and higher foreign takeover premia for U.S. Targets. The results go beyond these findings, though, to provide a richer understanding of the nature of the exchange rate relationship. These new findings provide a first step in distinguishing among the various FDI models. Article Number 5: Strategic Foreign Direct Investment and Exchange-Rate Uncertainty. This research study has been conducted by Hongmo Sung and Harvey E. Lapan. The main purpose of this paper is to investigate how exchange-rate uncertainty affects the foreign direct investment decision of a risk neutral multinational firm (MNF). Data are taken from MNF/ Local Firm by opening home plant, or by opening foreign plant and by opening both. The result shows that shows that when a MNF is in competition with a local firm, the exchange-rate volatility, by increasing the value of the option the MNF has to operate in several localities, effectively gives the MNF a strategic advantage that May force the local firm from the market. This result, though derived from different Premises, is analogous to articles that demonstrate that protecting a home market Can confer a strategic advantage in foreign markets. Finally, our results also indicate That increased uncertainty may, under certain circumstances, raise the value of Precommiting actions, a result that is counter to previous res ults. Data and Methodology Data: Variables: Independent Variable: Inter Bank Exchange Rate Dependent Variable: Foreign Direct Investment Inflow Hypothesis: Inter Bank Exchange Rate has a positive impact on Foreign Direct Investment Inflow in Pakistan. Sample size: Sample data of last 19 years is to be taken to conduct this research study. Data has been taken from the time period 1990 till 2009. Source: State Bank of Pakistan website (www.sbp.org.pk) Brokerage Houses www.oanda.com www.indexmundi.com www.kalpoint.com Economic Survey of Pakistan Model: FDI = o + 1 (Exchange) + Error Term Where, FDI = Foreign Direct Investment Inflow 1 (Exchange) = Inter Bank Exchange Rate Methodology: To test the hypothesis Regression Analysis technique is to be used.