Exchange-rate strategies in the competition for attracting foreign direct investment

Building on the needs for long-term capital inflows in developing countries , this paper reconsiders the choice of an exchange-rate regime by integrati ng the determinants of multinational firms' locations. The trade-off betwee n price competitiveness and a stable nominal exchange rate is modeled. Empi rical results show that exchange-rate volatility is detrimental to foreign direct investment (FDI) anti that its impact compares with that of misalign ments. One policy implication is that the building of currency blocks could be a way of increasing FDI to emerging countries as a whole. Tile frontier s of monetary areas would then be strongly influenced by geography, as FDI is.