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The heterogeneous sectoral productivity impacts of FDI on real exchange rate

Author

Listed:
  • Fei Guo
  • Eric Evans Osei Opoku
  • Isabel Kit-Ming Yan

Abstract

The Balassa-Samuelson effect provides a theoretical explanation for the deviation of the real exchange rate (RER) from its purchasing power parity based on the heterogeneous productivity growth in the tradable and non-tradable sectors. This paper bridges the literature on foreign direct investment (FDI) spillovers with the Balassa-Samuelson effect by theoretically and empirically showing that (1) the productivity impact of inward FDI is notably larger in the tradable sector than in the non-tradable sector, generating an appreciation effect on the RER; (2) the magnitude of heterogeneous productivity impacts of inward FDI in the tradable and non-tradable sectors is commensurate with the technological backwardness in the two sectors relative to the world leaders.

Suggested Citation

  • Fei Guo & Eric Evans Osei Opoku & Isabel Kit-Ming Yan, 2021. "The heterogeneous sectoral productivity impacts of FDI on real exchange rate," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 30(7), pages 1101-1121, October.
  • Handle: RePEc:taf:jitecd:v:30:y:2021:i:7:p:1101-1121
    DOI: 10.1080/09638199.2021.1936135
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