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Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach

  • Kenneth A. Froot
  • Jeremy C. Stein

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.

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File URL: http://www.nber.org/papers/w2914.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2914.

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Date of creation: Mar 1989
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Publication status: published as The Quarterly Journal of Economics, Vol. CVI, No. 427, Iss. 4, pp. 1191-121 7, (November 1991).
Handle: RePEc:nbr:nberwo:2914
Note: ME ITI IFM
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  1. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  2. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  3. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
  4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  5. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  6. Myron S. Scholes & Mark A. Wolfson, 1989. "The Effects of Changes in Tax Laws on Corporate Reorganization Activity," NBER Working Papers 3095, National Bureau of Economic Research, Inc.
  7. Krugman, Paul, 1989. "The J-Curve, the Fire Sale, and the Hard Landing," American Economic Review, American Economic Association, vol. 79(2), pages 31-35, May.
  8. Bruce C. Greenwald & Joseph E. Stiglitz & Andrew Weiss, 1984. "Informational Imperfections in the Capital Market and Macro-Economic Fluctuations," NBER Working Papers 1335, National Bureau of Economic Research, Inc.
  9. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  10. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  11. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  12. Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers 583, Queen's University, Department of Economics.
  13. Jaffee, Dwight M & Russell, Thomas, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 651-66, November.
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