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Foreign direct investment, trade, and real exchange rate linkages in developing countries

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Abstract

We investigate the relationships among trade, foreign direct investment and the real exchange rate between a set of Southeast Asian and Latin American countries and both the United States and Japan. Foreign direct investment by both Japan and the United States to the Southeast Asian countries in our sample is significantly affected by bilateral real exchange rates. Also, trade between the countries in our sample and the United States and Japan is significantly affected by foreign direct investment. These sets of relationships, between the real exchange rate and foreign direct investment, and between foreign direct investment and trade, support two channels through which the real exchange rate affects trade: a direct effect on the relative price of goods and an indirect effect through foreign direct investment.
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Suggested Citation

  • Linda S. Goldberg & Michael W. Klein, 1996. "Foreign direct investment, trade, and real exchange rate linkages in developing countries," Proceedings, Federal Reserve Bank of San Francisco, pages 73-100.
    • Handle: RePEc:fip:fedfpr:y:1996:p:73-100
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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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