The heterogeneous sectoral productivity impacts of FDI on real exchange rate

Fei Guo, Eric Opoku and Isabel Kit-Ming Yan

The Journal of International Trade & Economic Development, 2021, vol. 30, issue 7, 1101-1121

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.

Date: 2021
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DOI: 10.1080/09638199.2021.1936135

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