FDI, exchange rate and firm's gain in terms of real assets

Nizam, Ahmed Mehedi (2023): FDI, exchange rate and firm's gain in terms of real assets.

Abstract

Here we argue that the difference between market exchange rate and PPP exchange rate of the local currency unit with respect to the investing one induces gain/loss for the investing firm in terms of ownership of real assets. When the market exchange rate of the local currency unit is greater than its PPP exchange rate, then the foreign investors gain in terms of PPP in the local market, i.e., the foreign investors now get the ownership of more assets than they could probably have in their native land by investing the exact same amount of money. On the other hand, when the market exchange rate is lower than the PPP exchange rate, then the foreign investors incur losses in terms of asset ownership, i.e., they now own less amount of physical assets than they could have alternatively owned if they chose to invest in their native land instead. Building upon the above arguments, here we empirically estimate the regions where US FDI should flow toward in order to reap the maximum benefits arising out of exchange rate differentials and compare it with the actual US investments abroad. The strategy presented here will provide firms a new perspective to gauge their overseas investment opportunities.

• Item Type: MPRA Paper
• Language: English
• Keywords: FDI; market exchange rate; PPP exchange rate; multinational firms; wealth transfer
• Subjects: F - International Economics > F3 - International Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

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