Exchange rates and FDI: Goods versus capital market frictions

Claudia Buch and Joern Kleinert ()

No 304, Tübinger Diskussionsbeiträge from University of Tübingen, School of Business and Economics

Abstract: Economic theory provides two main explanations why changes in exchange rates can affect foreign direct investment (FDI). According to a first explanation, FDI reacts to exchange rate changes if there are information frictions on capital markets and if the investment by firms depends on their net worth (capital market friction hypothesis). According to a second explanation, FDI reacts to exchange rate changes if output and factor markets are segmented, and if firm-specific assets are important (goods market friction hypothesis). We provide a unified theoretical framework of the two explanations and test the model using German sectoral data derived from detailed firm-level data. We find greater support for the goods market friction hypothesis.

Keywords: FDI; exchange rates; net worth effects; multinational firms (search for similar items in EconPapers)
JEL-codes: F21 F23 F31 (search for similar items in EconPapers)
Date: 2006
References: View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Exchange Rates and FDI: Goods versus Capital Market Frictions (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuedps:304

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