A Theoretical Note on Sector-specific FDI Inflow in Developing Economies and the Real Exchange Rate
| Date | 01 May 2020 |
| Published date | 01 May 2020 |
| Author | Biswajit Mandal,Prasun Bhattacharjee |
| DOI | 10.1177/0015732519894135 |
| Subject Matter | Articles |
A Theoretical Note
on Sector-specific FDI
Inflow in Developing
Economies and the
Real Exchange Rate
Biswajit Mandal1 and Prasun Bhattacharjee2
Abstract
Using a hybrid of the Heckscher–Ohlin model and specific factor model of trade,
this article considers the phenomenon of FDI inflows only in the exportable
sector of developing economies. We investigate the impact of such capital flow
on factor prices and the real exchange rate (RER) in the host country. Our results
indicate that the exportable production expands while both the non-traded good
production and the return to the factor specific to the non-traded good decrease,
consequent upon an inflow of capital specific to the exportable sector. The effect
of such inflow of foreign capital on the RER is unambiguous and it increases.
JEL Codes: F1, F21, F31
Keywords
Foreign capital inflow, real exchange rate, developing economies, trade, special
economic zone
Introduction
Motivating factors for allowing foreign capital in an economy may be multifac-
eted, the traditional ones being: diversification of the host country’s production
basket by channelising resources in multiple directions of production; exploration
Article
1 Department of Economics and Politics, Visva-Bharati University, Santiniketan, West Bengal, India.
2 Department of Economics and Finance, East Tennessee State University, Johnson City, TN, USA.
Corresponding author:
Prasun Bhattacharjee, Department of Economics and Finance, East Tennessee State University, 1276
Gilbreath Dr, Box 70300, Johnson City, TN 37614-1700, USA.
E-mail: bhattacp@etsu.edu
Foreign Trade Review
55(2) 189–198, 2020
© 2020 Indian Institute of
Foreign Trade
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DOI: 10.1177/0015732519894135
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