Exchange Rates and Foreign Direct Investment: The Role of Mobility

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.