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Exchange rate, political environment and FDI decision
We examine the role of exchange rate (ER) and political environment (PE) alterations in
determining Japanese Multinational Companies’ (MNCs) investment decisions. First, we
present a model where MNCs make an investment decision under uncertainty. Second, we
employ a panel data analysis of 56 developed and developing countries for the period of
1995–2012 (country and industry level). The main findings show that MNCs are less likely
to tolerate exchange rate risk and political risk in developing countries. However, they
may tolerate these risks in developed countries if the level of initial stability is far enough
than their essential need. Results of the cross-effect analysis imply a complementarity of
these risks. The impact of ER expectation remained ambiguous. Various interpretations
and mechanisms are discussed.