The Heterogeneous Sectoral Productivity Impacts of FDI on Real Exchange Rate

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)1101-1121
Journal / PublicationThe Journal of International Trade and Economic Development
Issue number7
Online published8 Jun 2021
Publication statusPublished - 2021


The Balassa-Samuelson effect provides a theoretical explanation for the deviation of the real exchange rate (RER) from its purchasing power parity based on the heterogeneous productivity growth in the tradable and non-tradable sectors. This paper bridges the literature on foreign direct investment (FDI) spillovers with the Balassa-Samuelson effect by theoretically and empirically showing that (1) the productivity impact of inward FDI is notably larger in the tradable sector than in the non-tradable sector, generating an appreciation effect on the RER; (2) the magnitude of heterogeneous productivity impacts of inward FDI in the tradable and non-tradable sectors is commensurate with the technological backwardness in the two sectors relative to the world leaders.

Research Area(s)

  • foreign direct investment, productivity impacts, real exchange rate, Tradable and non-tradable sectors