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.