A Theoretical Note on Sector-specific FDI Inflow in Developing Economies and the Real Exchange Rate

Biswajit Mandal and Prasun Bhattacharjee

Foreign Trade Review, 2020, vol. 55, issue 2, 189-198

Abstract: Using a hybrid of the Heckscher–Ohlin model and specific factor model of trade, this article considers the phenomenon of FDI inflows only in the exportable sector of developing economies. We investigate the impact of such capital flow on factor prices and the real exchange rate (RER) in the host country. Our results indicate that the exportable production expands while both the non-traded good production and the return to the factor specific to the non-traded good decrease, consequent upon an inflow of capital specific to the exportable sector. The effect of such inflow of foreign capital on the RER is unambiguous and it increases. JEL Codes: F1, F21, F31

Keywords: Foreign capital inflow; real exchange rate; developing economies; trade; special economic zone (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:sae:fortra:v:55:y:2020:i:2:p:189-198

DOI: 10.1177/0015732519894135

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