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
