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Foreign Capital Inflow and Real Exchange Rate Appreciation in Developing Economies: Theory and Empirical Evidence

Author

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  • Biswas Anindya

    (Department of Business, Spring Hill College, 4000 Dauphin St., Mobile, AL 36608, USA)

  • Mandal Biswajit

    (Department of Economics & Politics, Visva-Bharati University, Santiniketan, India)

  • Saha Nitesh

    (GlaxoSmithKline, 5 Crescent Drive, Philadelphia, PA, 19112)

Abstract

Foreign direct investment specially targeted to export sector is relatively new phenomenon in the global economy. Such inflow of foreign capital changes the sectoral composition of the economy, and it has some influence on the exchange rate of the destination country. In this study, we attempt to provide underlying theoretical and empirical explanations for exchange rate appreciation due to foreign capital inflow. We first use an extended three-sector specific factor model to explain analytically why and how an inflow of foreign capital boosts the price of a nontradable good that helps tilting the exchange rate in favor of the host country and then conduct an empirical analysis based on a panel dataset of 12 prominent developing countries over the time period 1980–2011 to substantiate our theoretical findings. We also strive to look at the possible consequences on factor prices and on sectoral de-composition of a representative economy.

Suggested Citation

  • Biswas Anindya & Mandal Biswajit & Saha Nitesh, 2014. "Foreign Capital Inflow and Real Exchange Rate Appreciation in Developing Economies: Theory and Empirical Evidence," Global Economy Journal, De Gruyter, vol. 14(3-4), pages 1-13, October.
    • Handle: RePEc:bpj:glecon:v:14:y:2014:i:3-4:p:13:n:5
    DOI: 10.1515/gej-2014-0020
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    1. Ghosh Madanmohan & Wang Weimin, 2010. "Does FDI Accelerate Economic Growth? The OECD Experience Based on Panel Data Estimates for the Period 1980-2004," Global Economy Journal, De Gruyter, vol. 9(4), pages 1-23, January.
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    6. Whalley John & Weisbrod Aaron, 2012. "The Contribution of Chinese FDI to Africa's Pre Crisis Growth Surge," Global Economy Journal, De Gruyter, vol. 12(4), pages 1-28, December.
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    Cited by:

    1. Jung Wan Lee & Tantatape Brahmasrene, 2020. "Exchange Rate Movements and Structural Break on China FDI Inflows," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(2), June.
    2. Biswajit Mandal & Prasun Bhattacharjee, 2020. "A Theoretical Note on Sector-specific FDI Inflow in Developing Economies and the Real Exchange Rate," Foreign Trade Review, , vol. 55(2), pages 189-198, May.
    3. Mandal, Biswajit & Biswas, Anindya, 2015. "Sector Specific Inflow of capital, Non-Traded sector and an Increase in Real Exchange Rate," MPRA Paper 68226, University Library of Munich, Germany.

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