Exchange rates and foreign direct investment

Prepare and submit a paper on exchange rates and foreign direct investment. The behavior of exchange rates on the international capital market has a significant bearing on the number of capital resources that can be marshaled by multinational corporations to enable them to carry out investments in the host countries. A country’s currency is said to have undergone depreciation if there is a general fall in the value of the country’s currency relative to the main value of another country’s currency. Within the context of this essay, the Japanese Yen can undergo a depreciation against one of the leading currencies such as the US Dollar or the Euro if its value falls in relative terms to any of them. Suffice to cite a hypothetical illustration to buttress the foregoing point. Should the Japanese Yen fall against the United States Dollar by saying 25 percentage points then the most likely impact is that cost of production by another hypothetical corporation will be significantly lower by 25%? The resulting low cost of the Yen can serve as an incentive for investment because a would-be corporation will have to pay a low cost for wages in addition to the prevailing low cost of production relative to what it will be in the United States. This phenomenon of attractiveness due to exchange rate differences among countries is known as the relative wage concept (Froot & Stein, 1991). However, this latter assertion ought to be treated with some level of caution taking note of the fact that in the most absolute sense for this to occur the changes in the exchange rate has to be in line with some preconditions of which include an associated parallel between the significant changes in the relative costs of production across both the United States and Japan and above all this should not in any way be altered by any overt or covert changes in either the cost of production or the wages in Japan where this investment will be taken place. However, this latter assertion ought to be treated with some level of caution taking note of the fact that in the most absolute sense for this to occur the changes in the exchange rate has to be in line with some preconditions of which include an associated parallel between between the significant changes in the relative costs of production across both the United States and Japan and above all this should not in any way be altered by any overt or covert changes in either the cost of production or the wages in Japan where this investment will be taken place. In addition, the overall relevance of the relative wage factor will become negligible in the event of the advent of an anticipated movement in the exchange rate. This has to do with either a direct or indirect rise in the cost of carrying out an investment in the host nation in this case which is Japan. The point that should be noted here is that in the most conventional form the factors that fulfill the interest rate parity are consistent with risk-adjusted rates of return in both the United States and Japan. Any shift in any of the above-mentioned factors can change the entire course of a foreign direct investment stream. In a deeper sense, the effects of changes in the foreign exchange market on investments are more profound on multinational corporations.

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