Correlation Between Exchange Rate And Foreign Direct Investment

812 Words Aug 30th, 2015 4 Pages
Theories related to the casual linkage between exchange rate and foreign direct investment (FDI) began to appear in the 1970s and since then a significant number of theories and empirical evidences have been documented. For example, the theories of Cushman (1985), Froot and Stein (1991), Blonigen (1997) and Kohlhagen (1977) are said to have shed a light for subsequent theoretical and empirical investigations. Among others, the theoretical works of Froot and Stein (1991), and Blonigen (1997a) have been the two most influential theories that have changed the vicious thoughts of academicians on the relationship between exchange rates and FDI. Froot and Stein, and Blonigen suggest that the impact of exchange rates on FDI depends on the contribution of the exchange rates of a host country to the wealth of an investor who decides to invest in a sovereign country. As the theories of Froot and Stein, and Blonigen were based on the assumption of imperfect capital markets, currency depreciation of a host country is the best alternative for a foreign investor than external source of capital including borrowing to finance an overseas investment. The depreciation of a host country’s currency also adds up to the wealth of a foreign investor by lowering production cost and other related fees. It also increases a foreign investor’s competitive power in a host country as depreciation diminishes the monopoly power of domestic investors. For example, a bid between a foreigner and a…

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