Exchange rate regimes and FDI in developing countries: A propensity score matching approach

• Published in: Journal of international money and finance 2017-10, Vol.77, p.143-163
• Main Authors: Cushman, David O., De Vita, Glauco
• Format: Article
• Language: English
• Subjects: Developing countries; Exchange rate regime; Foreign direct investment; Propensity score matching
• ISSN: 0261-5606; 1873-0639
• DOI: 10.1016/j.jimonfin.2017.07.018

•We investigate the impact of exchange rate regimes on FDI into developing countries.•Propensity score matching is applied to a large set of developing countries.•Both large and parsimonious logit models are used to generate the propensity scores.•Average treatment effects suggest that de facto relatively fixed regimes encourage FDI.•In addition, the estimated treatment effects are economically important. Theory suggests that regimes of relatively fixed exchange rates encourage inward foreign direct investment (FDI) relative to regimes of more flexible exchange rates. We use propensity score matching (PSM) to investigate the relationship between the exchange rate regimes of 70 developing countries and FDI into such countries using de facto regime classifications. We include a large number of variables in the logit equation that estimates the propensity score, the probability of regime choice. We also use general-to-specific modeling to get alternative, parsimonious versions. Based on four matching procedures, the average treatment effects suggest, with overall modest statistical significance, that relatively fixed de facto regimes do encourage FDI compared with relatively floating regimes. In addition, the estimated effects are sometimes economically large.