Exchange Rates and Foreign Direct Investment

With the rapid growth of China and India and the resurgence of Southeast Asia post 1997-98, emerging Asia has once again become one of the most dynamic regions in the world. This dynamism has in turn been fuelled largely by a carefully calibrated embracement of economic openness to international trade, investments and capital flows. While much has been written about international trade, there has somewhat been less work on the issue of capital flows, macroeconomic management and foreign direct investment (FDI) to and from the region, a gap that this book attempts to fill. The book is divided into two parts. The first part of the book deals with selected issues pertaining to macroeconomic management in small and open economies with particular focus on the exchange rates. The second part of the book deals with the trends and determinants of FDI in emerging Asia, its importance as a source of finance, its impact on growth and development, and the nexus between FDI and foreign portfolio flows (FPI). Overall, the chapters in this book tackle important policy issues of contemporary relevance, but are informed by analytical frameworks, data and empirics. While each of the topic areas chosen in individual chapters is intentionally narrow, the book as a whole covers a number of areas and countries/regions within Asia (i.e. East, Southeast and South Asia). While the chapters have been written in a manner that can stand up to academic scrutiny, they are also meant to be accessible to policy makers, researchers and others who might be interested in FDI and related issues in Asia.

List of figures	p. xvi
List of tables	p. xviii
Preface	p. xx
Acknowledgements	p. xxiv
Exchange rate regimes and policies	p. 1
How can small and open economies manage capital inflows? The cases of Singapore and Taiwan	p. 3
Introduction	p. 3
Reserve build-up and monetary policy operations in Singapore and Taiwan	p. 5
Estimating equations	p. 10
Empirics	p. 13
Empirical results	p. 16
Concluding remarks	p. 21
theoretical basis for the simultaneous equations	p. 21
Do exchange rate changes pass-through into inflation in developing countries (with particular reference to India)?	p. 29
Introduction	p. 29
Determinants of ERPT	p. 30
Empirical literature on ERPT	p. 31
A simple framework to understand and estimate ERPT	p. 36
Data and results	p. 38
Concluding remarks	p. 44
Summary of ERPT studies on India	p. 48
What is the extent of exchange rate flexibility in South Asia?	p. 54
Introduction	p. 54
Degree of influence of G3 currencies on Asian exchange rates	p. 56
Concluding remarks	p. 62
How can small and open economies in emerging Asia deal with external shocks? Monetary policy and exchange rate options	p. 65
Introduction	p. 65
Internal balance: inflation and monetary conditions index	p. 65
External balance: precautionary reserve demand and balance of payments	p. 67
Appropriate policy responses to various exogenous external shocks	p. 68
Concluding remarks	p. 74
What role has the real exchange rate had in Asian economic development?	p. 78
Introduction	p. 78
Defining the RER	p. 80
RER undervaluation in East Asia	p. 81
Concluding remarks	p. 86
Foreign direct investment in emerging Asia	p. 93
What is the impact of foreign direct investment on Asian growth and development?	p. 95
Introduction	p. 95
FDI and production fragmentation	p. 97
Does FDI liberalisation contribute to growth?	p. 104
Concluding remarks	p. 112
How significant are intra-Asian foreign direct investment flows and what are their determinants?	p. 119
Introduction	p. 119
The extent of intra-Asian FDI flows: trends and patterns	p. 121
Determinants of FDI flows to emerging Asia	p. 131
Concluding remarks	p. 137
Summary of determinants	p. 138
How has Singapore expanded its global footprint through foreign direct investment?	p. 145
Introduction	p. 145
Nature and trends of OFDI from Singapore	p. 147
Role of the public sector	p. 153
Concluding remarks	p. 159
What is the extent and distribution of foreign direct investment inflows to India?	p. 165
Introduction	p. 165
Trends in FDI inflows in India	p. 166
Country sources of FDI	p. 171
FDI inflows by sector	p. 173
Spatial distribution of FDI within India	p. 177
Concluding remarks	p. 179
Examining the empirical relationship between FDI and economic growth	p. 180
How different are foreign direct investment flows from portfolio flows?
Introduction	p. 187
Literature on FDI versus FPI	p. 189
FDI, FPI and the role of distance	p. 193
Model and data sources	p. 194
Empirical results	p. 197
Concluding remarks	p. 205
Index	p. 211
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Exchange Rates and Foreign Direct Investment in Emerging Asia: Selected Issues and Policy Options

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