1. Building a panel dataset to investigate the impact of exchange rate regimes on FDI flows Andrew Abbott & Glauco De Vita a.abbott@bath.ac.uk & gde-vita@brookes.ac.uk AIM: To investigate the impact of different ER regimes upon FDI flows using panel data from 27 OECD & non-OECD countries for the period 1980-2003 We gratefully acknowledge financial support by the Economic and Social Research Council (grant RES- 000-22-2350).

2. Context From 1980 to 2003, 450% increase in real world FDI flows Much research on the determinants of FDI and its growth enhancing effects but no attention paid to ER regimes and FDI Striking given the voluminous literature on ER regimes and trade (Rose, 2000 onwards) Schiavos (2007, OEP) gravity model investigates the impact of EMU on FDI flows. OLS & Tobit results show that EMU has increased FDI flows by 160 to 320% (caution: EMU data 1999-2001)

3. Our contribution CUs are only one regime among feasible policy set. First set of estimates of effect of a wide menu of ER regimes on bilateral FDI flows between country-pairs (CU-CU; CU-FLT; CU-FIX; FIX-FIX; DFIX; FIX-FLT; and FLT-FLT) Consider which ER regime the effect is benchmarked against. We compare the specific effect of each regime combination vis-à-vis the more plausible alternative of double-float

4. Our contribution In terms of the categorisation of ER regimes, comparative use of 3 different classifications: Reinhart and Rogoff (2004); Shambaugh (2004) and IMF (various issues of ERAR reports) We explicitly control for simultaneity bias and reverse causality – instrumental variable estimation within SYS-GMM framework exploits time series variation while accounting for country specific effects

6. Model Our unbalanced panel (27 OECD and non-OECD countries over 1980-2003), yields over 7,000 country- year observations across almost 350 country-pairs Drawing from standard variables typically entering the gravity equation, our baseline model is expressed (in long-run form) as: where fdi is the log of total bi-lateral real FDI flows between countries i and j at period t. Sum of inward and outward FDI flows, calculated from the OECDs International Direct Investment Statistics database

7. Data sources Gravity type variables (dis; LANG; COL; COMLAN) - Source: Centre d'Etudes Prospectives et d'Informations Internationales, see http://www.cepii.fr/ ER regime dummies (CU-CU; CU-FIX; CU-FLT; FIX-FIX; DFIX; FIX-FLT) calculated from classifications produced by Reinhart & Rogoff (2004), Shambaugh (2004) and various issues of the IMFs ARERAR

9. References Reinhart, C., Rogoff, K. (2004) The modern history of exchange rate arrangements: a reinterpretation. Quarterly Journal of Economics 119, 1-48. Rose, A. (2000) One money, one market: the effect of common currencies on trade. Economic Policy 15, 7-33. Schiavo, S. (2007) Common currencies and FDI flows. Oxford Economic Papers (Advance Access), March 3, 1-25. Shambaugh, J.C. (2004) The effect of fixed exchange rates on monetary policy. Quarterly Journal of Economics 119, 1, 300- 351.