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Exchange rates and FDI: Goods versus capital market frictions

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  • Buch, Claudia M.
  • Kleinert, Jörn

Abstract

Economic 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 Info

Paper provided by University of Tübingen, School of Business and Economics in its series Tübinger Diskussionsbeiträge with number 304.

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Date of creation: 2006
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Handle: RePEc:zbw:tuedps:304

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Related research

Keywords: FDI; exchange rates; net worth effects; multinational firms;

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Cited by:
  1. Aray, Henry & Gardeazabal, Javier, 2005. "Going Multinational under Exchange Rate Uncertainty," DFAEII Working Papers 2005-05, University of the Basque Country - Department of Foundations of Economic Analysis II.
  2. Busse, Matthias & Hefeker, Carsten & Nelgen, Signe, 2010. "Foreign direct investment and exchange rate regimes," HWWI Research Papers 2-17, Hamburg Institute of International Economics (HWWI).

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