Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/40326 
Year of Publication: 
2006
Series/Report no.: 
Tübinger Diskussionsbeiträge No. 304
Publisher: 
Eberhard Karls Universität Tübingen, Wirtschaftswissenschaftliche Fakultät, Tübingen
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: 
Document Type: 
Working Paper

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