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Strategic Foreign Direct Investment and Exchange-Rate Uncertainty

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  • Sung, Hongmo
  • Lapan, Harvey E

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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Bibliographic Info

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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Cited by:
  1. Katheryn Niles Russ, 2007. "Exchange Rate Volatility and First-Time Entry by Multinational Firms," NBER Working Papers 13659, National Bureau of Economic Research, Inc.
  2. Joshua Aizenman & Nancy Marion, 2001. "The Merits of Horizontal versus Vertical FDI in the Presence of Uncertainty," NBER Working Papers 8631, National Bureau of Economic Research, Inc.
  3. Lochner, Stefan & Broll, Udo, 2007. "German Foreign Direct Investment and Wages," Dresden Discussion Paper Series in Economics 10/07, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  4. Matthias Busse & Carsten Hefeker & Signe Nelgen, 2013. "Foreign Direct Investment and Exchange Rate Regimes," Economics Bulletin, AccessEcon, vol. 33(1), pages 843-858.
  5. Stephen Pavelin & Lynda A. Porter, 2011. "Race-to-the-Bottom or -Top at Home or Abroad: Health and Safety Standards and the Multinational Firm," The Economic and Social Review, Economic and Social Studies, vol. 42(3), pages 289–311.
  6. Henry Aray & Javier Gardeazabal, 2008. "Going Multinational under Exchange Rate Uncertainty," ThE Papers 08/19, Department of Economic Theory and Economic History of the University of Granada..
  7. Russ, Katheryn, 2004. "The Endogeneity of the Exchange Rate as a Determinant of FDI: A Model of Money, Entry, and Multinational Firms," Santa Cruz Department of Economics, Working Paper Series qt9xr4f238, Department of Economics, UC Santa Cruz.
  8. Henry Aray, 2007. "International Monopoly under Uncertainty," ThE Papers 07/05, Department of Economic Theory and Economic History of the University of Granada..
  9. Michal Brzozowski, 2003. "Exchange Rate Variability and Foreign Direct Investment - Consequences of EMU Enlargement," CASE Network Studies and Analyses 0258, CASE-Center for Social and Economic Research.
  10. 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.
  11. Hisham Foad, 2005. "Currency Unions, Options, and Foreign Direct Investment," Emory Economics 0516, Department of Economics, Emory University (Atlanta).
  12. 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.

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