Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 59: Exchange Rates and Foreign Direct Investment: The Role of Mobility

Tore Ellingsen ()
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Tore Ellingsen: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden

Abstract: Empirical evidence shows that a weak currency attracts foreign direct investment. Current conventional wisdom says that all firms, regardless of their nationality, should be affected equally by changes in the exchange rate, and hence that there is no simple explanation for this regularity. I show that this neutrality result holds only under the unreasonable assumption that all firms are equally mobile internaitonally, The simple explanation for the relationship between FDI and exchange rates is that, among firms located in a particular country, domestically owned firms are on average less mobile than firms owned by foreigners.

Keywords: Foreign direct investment; exchange rates; multinational firms; international mobility

JEL-codes: F21; F23

5 pages, June 1995

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