Foreign direct investment and exchange rate uncertainty in South-East Asia

We investigate the relationship between exchange rate volatility, exchange rate risk diversification and the location of foreign direct investment in the manufacturing industries of Indonesia, Malaysia, Philippines and Thailand. We found a strong role for the yen|dollar exchange rate in location decisions of the US and Japanese investors. There is evidence in the literature that Japanese firms invest in Asia to circumvent the appreciation of the yen. Our results show that the volatility of the yen and the correlation between local exchange rates and the yen are significant determinants of the US and Japanese investments in the region.