A General Equilibrium Analysis of Foreign Direct Investment and the Real Exchange Rate

Milind M Shrikhande

International Journal of Finance & Economics, 2002, vol. 7, issue 4, 309-25

Abstract: Modern theories of foreign direct investment claim that foreign direct investment occurs because certain domestic assets are worth more under foreign control. This view developed by industrial organization theorists is indifferent to the financing mode of a foreign acquisition as well as to the interaction between foreign direct investment (FDI) and real exchange rates. However, empirical research has uncovered a significant relationship between FDI and exchange rates. Second, partial equilibrium models of FDI have focused on FDI as foreign acquisitions of existing assets but not on new capital formation initiated by foreigners. We complement these contributions by developing a welfare-maximizing, general equilibrium model of the interaction between FDI as cross-border acquisitions, and the real exchange rate. Copyright @ 2002 by John Wiley & Sons, Ltd. All rights reserved.

Date: 2002
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