Removing foreign direct investment's exchange rate risk in developing economies: the case for a foreign exchange custodian board |
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| Institution: | 1. Asian Development Bank Institute (ADBI), Kasumigaseki Bldg. 8F, 3-2-5 Kasumigaseki Chiyoda-ku, Tokyo 100-6008, Japan;2. ASEAN+3 Macroeconomic Research Office (AMRO), Singapore;1. Department of Economics, Rochester Institute of Technology, 92 Lomb Memorial Drive, Rochester, NY 14623-5604, USA;2. Department of Spatial Economics, VU University, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands;3. A. Mickiewicz University, Poznan, Poland;1. University of Paris 1, CRIDUP, 90 rue de Tolbiac, Paris 75013, France;2. University of Paris-Est, IFSTTAR–DEST, 14-20 boulevard Newton, Cité Descartes, Champs-sur-Marne, 77447 Marne-la-Vallée Cedex 2, France |
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| Abstract: | This paper proposes a system design (foreign exchange custodian board) that may stimulate foreign direct investment (FDI) in developing economies through the removal of foreign investors' exchange rate risk in investment outlay. For any expected distribution of exchange rate on any interval around the starting exchange rate, there exists a non-negative custodian service charge that both the developing economy and foreign investors can benefit from the proposed system. When the increase in domestic factors' value added caused by FDI is sufficiently large, the developing economy will benefit even in the absence of any custodian service charge. |
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