Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach
We examine the connection between exchange rates and foreign direct investment that arises when globally integrated capital markets are subject to informational imperfections. These imperfections cause external financing to be more expensive than internal financing, so that changes in wealth translate into changes in the demand for direct investment. By systematically lowering the relative wealth of domestic agents, a depreciation of the domestic currency can lead to foreign acquisitions of certain domestic assets. we develop a simple model of this phenomenon and test for its relevance in determining international capital flows.
|Date of creation:||Mar 1989|
|Date of revision:|
|Publication status:||published as The Quarterly Journal of Economics, Vol. CVI, No. 427, Iss. 4, pp. 1191-121 7, (November 1991).|
|Note:||ME ITI IFM|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
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