Exchange rates and FDI: Goods versus capital market frictions

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tübinger Diskussionsbeiträge ; No. 304

Classification and Topics

• Classification: Wirtschaft ; Foreign Exchange ; Multinational Firms; International Business ; International Investment; Long-term Capital Movements
• Subject: FDI ; exchange rates ; net worth effects ; multinational firms ; Wechselkurs ; Direktinvestition ; Multinationales Unternehmen ; Unvollkommener Markt ; Theorie ; Deutschland

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Buch, Claudia M. ; Kleinert, Jörn
• Event: Veröffentlichung
• (who): Eberhard Karls Universität Tübingen, Wirtschaftswissenschaftliche Fakultät
• (where): Tübingen
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/40326
• URN: urn:nbn:de:bsz:21-opus-24374
• Last update: 10.03.2025, 11:42 AM CET