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Aliber's Currency Premium Theory The renewal of interest in FDI as a financial phenomenon in the post Hymer dissertation era is largely due to Aliber's currency premium theory. Various authors, in addition to Aliber, have since emphasised the link between exchange rates and FDI. While some have argued that exchange rates is one of the crucial factors that determine the location of a firm, others have also pointed out that exchange rate factors determine the extent to which firms finance their foreign activity by equity capital exports from their home country. The currency premium theory is not a general theory of FDI. It merely suggests that firms internalise imperfections in the capital and exchange rate markets, as they do with any other form of market failure. Aliber (1970, 1971) observed that the key factor in explaining the location of FDI involves capital market relationships, exchange risk and the market's preferences for...

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