International transmission of exchange rate volatility: Evidence from FIEs' investments in China

This paper studies the cross-border transmission of exchange rate volatility through foreign-invested enterprises (FIEs)' investments. We find that exchange rate volatility in FIEs' home countries reduces the investments made by FIEs, which is exacerbated in industries with greater external finance dependence. We further confirm that the reduction in investment is due to a decrease in financial support from FIEs' parent enterprises. By comparing FIEs whose parents are located in countries with different levels of financial development and in sectors with different levels of investment irreversibility, we test two potential channels of transmission, namely, the uncertainty channel and the financing channel. We also attempt to test the potential indirect impact on local firms through the production network.