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Foreign Capital Inflow and Real Exchange Rate Appreciation in Developing Economies: Theory and Empirical Evidence

Author

Listed:
  • Anindya Biswas

    (Department of Business, Spring Hill College, 4000 Dauphin St., Mobile, AL 36608, USA)

  • Biswajit Mandal

    (Department of Economics & Politics, Visva-Bharati University, Santiniketan, India)

  • Nitesh Saha

    (GlaxoSmithKline, 5 Crescent Drive, Philadelphia, PA, 19112)

Abstract

Foreign direct investment specially targeted to export sector is relatively new phenomenon in the global economy. Such inflow of foreign capital changes the sectoral composition of the economy, and it has some influence on the exchange rate of the destination country. In this study, we attempt to provide underlying theoretical and empirical explanations for exchange rate appreciation due to foreign capital inflow. We first use an extended three-sector specific factor model to explain analytically why and how an inflow of foreign capital boosts the price of a nontradable good that helps tilting the exchange rate in favor of the host country and then conduct an empirical analysis based on a panel dataset of 12 prominent developing countries over the time period 1980–2011 to substantiate our theoretical findings. We also strive to look at the possible consequences on factor prices and on sectoral de-composition of a representative economy.

Suggested Citation

  • Anindya Biswas & Biswajit Mandal & Nitesh Saha, 2014. "Foreign Capital Inflow and Real Exchange Rate Appreciation in Developing Economies: Theory and Empirical Evidence," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 14(03n04), pages 453-465, October.
    • Handle: RePEc:wsi:gejxxx:v:14:y:2014:i:03n04:n:gej-2014-0020
    DOI: 10.1515/GEJ-2014-0020
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    References listed on IDEAS

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    1. Tiwari Aviral Kumar, 2011. "Foreign Aid, FDI, Economic Freedom and Economic Growth in Asian Countries," Global Economy Journal, De Gruyter, vol. 11(3), pages 1-28, September.
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    3. de Boyrie Maria E, 2010. "Structural Changes, Causality, and Foreign Direct Investments: Evidence from the Asian Crises of 1997," Global Economy Journal, De Gruyter, vol. 9(4), pages 1-40, January.
    4. Basnet Hem C. & Upadhyaya Kamal P., 2014. "Do Remittances Attract Foreign Direct Investment? An Empirical Investigation," Global Economy Journal, De Gruyter, vol. 14(1), pages 1-9, June.
    5. Ghosh Madanmohan & Wang Weimin, 2010. "Does FDI Accelerate Economic Growth? The OECD Experience Based on Panel Data Estimates for the Period 1980-2004," Global Economy Journal, De Gruyter, vol. 9(4), pages 1-23, January.
    6. John Whalley & Aaron Weisbrod, 2012. "The Contribution of Chinese FDI to Africa's Pre Crisis Growth Surge," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 12(4), pages 1-28, November.
    7. Whalley John & Weisbrod Aaron, 2012. "The Contribution of Chinese FDI to Africa's Pre Crisis Growth Surge," Global Economy Journal, De Gruyter, vol. 12(4), pages 1-28, December.
    8. World Bank, 2013. "World Development Indicators 2013," World Bank Publications - Books, The World Bank Group, number 13191.
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    Cited by:

    1. Jung Wan Lee & Tantatape Brahmasrene, 2020. "Exchange Rate Movements and Structural Break on China FDI Inflows," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(2), June.
    2. Biswajit Mandal & Prasun Bhattacharjee, 2020. "A Theoretical Note on Sector-specific FDI Inflow in Developing Economies and the Real Exchange Rate," Foreign Trade Review, , vol. 55(2), pages 189-198, May.
    3. Mandal, Biswajit & Biswas, Anindya, 2015. "Sector Specific Inflow of capital, Non-Traded sector and an Increase in Real Exchange Rate," MPRA Paper 68226, University Library of Munich, Germany.

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    More about this item

    Keywords

    foreign capital inflow; real effective exchange rate; international trade; developing economies; traded and nontraded goods;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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