Exchange rates and FDI: Goods versus capital market frictions
AbstractEconomic theory provides two main explanations why changes in exchange rates can affect foreign direct investment (FDI). According to a first explanation, FDI reacts to exchange rate changes if there are information frictions on capital markets and if the investment by firms depends on their net worth (capital market friction hypothesis). According to a second explanation, FDI reacts to exchange rate changes if output and factor markets are segmented, and if firm-specific assets are important (goods market friction hypothesis). We provide a unified theoretical framework of the two explanations and test the model using German sectoral data derived from detailed firm-level data. We find greater support for the goods market friction hypothesis. --
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Bibliographic InfoPaper provided by University of Tübingen, School of Business and Economics in its series Tübinger Diskussionsbeiträge with number 304.
Date of creation: 2006
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FDI; exchange rates; net worth effects; multinational firms;
Other versions of this item:
- Claudia M. Buch & Jörn Kleinert, 2008. "Exchange Rates and FDI: Goods versus Capital Market Frictions," The World Economy, Wiley Blackwell, vol. 31(9), pages 1185-1207, 09.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
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