ORIGINAL PAPER The effect of exchange rates on firm exports and the role of FDI David Greenaway • Richard Kneller • Xufei Zhang Published online: 14 June 2012 Ó Kiel Institute 2012 Abstract This paper studies how exchange rate movements affect the export market entry and intensity decision of firms and the export behaviour of multina- tionals in the UK. Using data on British manufacturing firms we find that exchange rate movements have little effect on firm export participation but have a significant impact on export shares. Multinationals have at their disposal a greater array of instruments to deal with exchange rates changes, although their use may vary according to the motives behind FDI. We also find important differences according to the country of origin of multinational firms. Multinationals firms originating from outside of the EU are less affected by changes in the exchange rate compared to those inside, who appear similarly affected as domestic firms. Keywords Exchange rate movements  Export share  Multinational firms JEL classification F19  F23  F31 1 Introduction Following the collapse of the Bretton Woods System in the early 1970s, nominal and real exchange rates have fluctuated significantly. 1 These fluctuations have in D. Greenaway (&)  R. Kneller  X. Zhang GEP, School of Economics, University of Nottingham, Nottingham, UK e-mail: sue.berry@nottingham.ac.uk X. Zhang Business School, Middlesex University, London, UK 1 Bayoumia and Eichengreen (1998, Sect. 2 and Table 1) provide detailed evidence of exchange rate volatility pre- and post-Bretton Woods. Exchange rate changes can be broken down into two aspects: changes of exchange rate level and exchange rate uncertainty/volatility. 123 Rev World Econ (2012) 148:425–447 DOI 10.1007/s10290-012-0129-y