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Strategic Foreign Direct Investment and Exchange-Rate Uncertainty

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Author Info
Sung, Hongmo
Lapan, Harvey E

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Abstract

We investigate how exchange-rate uncertainty affects the foreign direct investment decision of a risk-neutral multinational firm (MNF). We assume the firm can open plants, each with decreasing average costs, in two different countries. Under certainty, the MNF would open only one plant. We demonstrate that with sufficient exchange-rate volatility, the firm can increase expected profits by opening several plants. We also show that if the MNF faces a competitor in the foreign market, the exchange risk, by inducing the MNF to open plants in both markets, may prevent entry by the local competitor. Copyright 2000 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 41 (2000)
Issue (Month): 2 (May)
Pages: 411-23
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Handle: RePEc:ier:iecrev:v:41:y:2000:i:2:p:411-23

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  1. Hisham Foad, 2005. "Currency Unions, Options, and Foreign Direct Investment," Emory Economics 0516, Department of Economics, Emory University (Atlanta). [Downloadable!]
  2. Katheryn Niles Russ, 2007. "Exchange Rate Volatility and First-Time Entry by Multinational Firms," NBER Working Papers 13659, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. David Sapsford & David Griffiths, 2003. "Foreign direct investment in Mexico," Working Papers 000054, Lancaster University Management School, Economics Department. [Downloadable!]
  4. Anthony Creane & Kaz Miyagiwa, 2007. "Export, Foreign Direct Investment, and Joint Ventures: Learning the Rival's Costs through Propinquity," ISER Discussion Paper 0691, Institute of Social and Economic Research, Osaka University. [Downloadable!]
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  5. Henry Aray, 2007. "International Monopoly under Uncertainty," ThE Papers 07/05, Department of Economic Theory and Economic History of the University of Granada.. [Downloadable!]
  6. Gerda Dewit & Dermot Leahy & Catia Montagna, 2003. "Employment protection and globalisation in dynamic oligopoly," Economics, Finance and Accounting Department Working Paper Series n1200103, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
    Other versions:
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