Objectives of the Foreign Exchange Volatility & FDI Investments

by Walter Johnson, studioD

A significant reason why firms invest abroad is to take advantage of cheaper currencies. If a firm invests in a country whose currency seems to be taking a "controlled devaluation," it means that exports from that country are cheaper, and hence, more competitive in global markets. A multinational corporation, MNC, can use currency volatility to increase its position on world markets.


With some exceptions, such as China's yuan, all currencies float on some kind of market mechanism. "Some kind" is significant because central banks are most often private associations of bankers of international origin. Therefore, currency values might take their cues from market pressures, but this should not obscure the significance of the banking interests when the value of the currency is decided upon. In other words, currency volatility might have political and global, not just domestic and economic, causes.


When a currency is devalued, it is worth less than before. This implies that the debts that the country suffers are also worth less. A banking cartel can print money to cover debt, which means that the currency becomes worth less, and also means that wages and savings accounts are worth less. In a famous phrase, inflation becomes a "tax on the poor." In many cases, multinational firms find buying supplies and exporting products in such a situation to be much cheaper.


The objectives, therefore, of currency volatility is to pay debts quickly and boost imports. It is debatable whether or not the resulting instability is worth the temporary boost in exports. Nevertheless, if an MNC holds yuan, the Chinese currency, and has investments in Nigeria, which has a privately controlled central bank that is devaluing, the yuan is suddenly more valuable. It means that the MNC in Nigeria has much cheaper products and, all other variables being equal, can massively increase its Chinese presence. It can also use its Chinese currency to buy up assets cheaply throughout Nigeria, since the yuan, in this scenario, is very valuable. The limitations, of course, are that if the Nigerian currency -- the naira -- falls too far, the instability and massive spike in interest rates will cancel any benefits the MNC might have gained. Therefore, "volatility" here should be called a "controlled or strategic devaluation."


Speculating on currency variances is the way that people such as George Soros make their money. If, for example, the Nigerian central bank will soon raise rates and boost the value of its currency, it might be a very profitable investment to dump your dollars and buy up nairas. In terms of comparative value, if the naira spikes in value, you have made a large profit by -- essentially -- doing nothing. Under certain circumstances, an MNC might engage in currency speculation -- that is, betting on currency volatility -- for the sake of undercutting its competitors who are using a more expensive currency and make a quick profit on the currency differentials.

About the Author

Walter Johnson has more than 20 years experience as a professional writer. After serving in the United Stated Marine Corps for several years, he received his doctorate in history from the University of Nebraska. Focused on economic topics, Johnson reads Russian and has published in journals such as “The Salisbury Review,” "The Constantian" and “The Social Justice Review."

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