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Title:Exchange rates and FDI: Goods versus capital market frictions PDF Logo
Authors:Buch, Claudia M.
Kleinert, Jörn
Issue Date:2006
Series/Report no.:Tübinger Diskussionsbeitrag 304
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.
Subjects:FDI
exchange rates
net worth effects
multinational firms
JEL:F31
F23
F21
Persistent Identifier of the first edition:urn:nbn:de:bsz:21-opus-24374
Document Type:Working Paper
Appears in Collections:Tübinger Diskussionsbeiträge, Universität Tübingen

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