Exchange Rates and FDI: Goods Versus Capital Market Frictions

23 Pages Posted: 17 Sep 2008

See all articles by Claudia M. Buch

Claudia M. Buch

Deutsche Bundesbank

Jörn Kleinert

affiliation not provided to SSRN

Abstract

Changes in exchange rates affect countries through their impact on cross-border activities such as trade and foreign direct investment (FDI). With increasing activities of multinational firms, the FDI channel is likely to gain in importance. Economic theory provides two main explanations why changes in exchange rates can affect FDI. According to the first explanation, FDI reacts to exchange rate changes if there are information frictions on capital markets and if investment depends on firms net worth (capital market friction hypothesis). According to the 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 these two explanations. We analyse the implications of the model empirically using a dataset based on detailed German firm-level data. We find greater support for the goods market than for the capital market friction hypothesis.

Suggested Citation

Buch, Claudia M. and Kleinert, Jörn, Exchange Rates and FDI: Goods Versus Capital Market Frictions. World Economy, Vol. 31, Issue 9, pp. 1185-1207, September 2008. Available at SSRN: https://ssrn.com/abstract=1269712 or http://dx.doi.org/10.1111/j.1467-9701.2008.01124.x

Claudia M. Buch (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Jörn Kleinert

affiliation not provided to SSRN

Register to save articles to
your library

Register

Paper statistics

Downloads
2
Abstract Views
582
PlumX Metrics