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A General Equilibrium Analysis of Foreign Direct Investment and the Real Exchange Rate

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  • Shrikhande, Milind M

Abstract

Modern theories of foreign direct investment claim that foreign direct investment occurs because certain domestic assets are worth more under foreign control. This view developed by industrial organization theorists is indifferent to the financing mode of a foreign acquisition as well as to the interaction between foreign direct investment (FDI) and real exchange rates. However, empirical research has uncovered a significant relationship between FDI and exchange rates. Second, partial equilibrium models of FDI have focused on FDI as foreign acquisitions of existing assets but not on new capital formation initiated by foreigners. We complement these contributions by developing a welfare-maximizing, general equilibrium model of the interaction between FDI as cross-border acquisitions, and the real exchange rate. Copyright @ 2002 by John Wiley & Sons, Ltd. All rights reserved.

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  • Shrikhande, Milind M, 2002. "A General Equilibrium Analysis of Foreign Direct Investment and the Real Exchange Rate," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(4), pages 309-325, October.
    • Handle: RePEc:ijf:ijfiec:v:7:y:2002:i:4:p:309-25
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    Cited by:

    1. Thomas A. Lubik & Katheryn N. Russ, 2012. "Exchange rate volatility in a simple model of firm entry and FDI," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 98(1Q), pages 51-76.
    2. Aray, Henry & Gardeazabal, Javier, 2010. "Going multinational under exchange rate uncertainty," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1171-1191, October.
    3. Katheryn N. Russ & Thomas A. Lubik, 2006. "Entry, Multinational Firms, and Exchange Rate Volatility," Working Papers 622, University of California, Davis, Department of Economics.
    4. Shauna Phillips & Fredoun Z. Ahmadi-Esfahani, 2008. "Exchange rates and foreign direct investment: theoretical models and empirical evidence ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(4), pages 505-525, December.
    5. Adil Suliman & Khaled Elmawazini & Mohammed Zakaullah Shariff, 2015. "Exchange rates and foreign direct investment: evidence for sub-saharan Africa," Journal of Developing Areas, Tennessee State University, College of Business, vol. 49(2), pages 204-226, April-Jun.
    6. Katheryn N. Russ & Thomas A. Lubik, 2006. "Entry, Multinational Firms, and Exchange Rate Volatility," Working Papers 157, University of California, Davis, Department of Economics.
    7. repec:fip:fedreq:y:2012:i:1q:p:51-76:n:vol.98no.1 is not listed on IDEAS
    8. Tag, Mehmet Nasih & Degirmen, Suleyman, 2022. "Economic freedom and foreign direct investment: Are they related?," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 737-752.
    9. Choi, Jongmoo Jay & Jeon, Bang Nam, 2007. "Financial factors in foreign direct investments: A dynamic analysis of international data," Research in International Business and Finance, Elsevier, vol. 21(1), pages 1-18, January.

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