Foreign Direct Investment in Canada and Mexico

Paper Summary:

This paper discusses and analyzes the exchange rate risks of foreign direct investment in Canada and Mexico. A company is interested in setting up manufacturing plants north and south of the border. The significance of examining a country's purchasing power parity is also important when conducting an economic analysis. The papers will show that hedging activities will afford for increased protection against risks of fluctuating exchange rates.

From the Paper:

"Foreign direct investment has become increasingly seamless over the years due to decreased trade barriers (i.e. NAFTA), tariffs, and foreign exchange rate risk. American corporations interested in expansion are taking advantage of NAFTA and setting up manufacturing facilities in Canada and Mexico, while saving on labour costs. Canada's high degree of stability, wealth, and abundance of natural resources make it an attractive target for foreign investors and has resulted in a trade relationship between the United States and Canada that is perhaps the closest and most extensive in the world (Miller 1993). Mexico has open conversion and transfer policies, which is a market-determined exchange rate scheme. The unstable currency of the Mexican Peso is balanced out by the stability of the Canadian dollar."

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