Exchange Rates and the Choice of Ownership Structure of Production Facilities
AbstractThe aim of this research is to study the effects of real exchange rates on the long-term ownership strategies of production facilities of firms entering foreign markets. Among the strategies considered are exporting (EXP), joint ventures with local partners (JV), and wholly owned production facilities (WOS) in the foreign country. Our research takes a first step in modeling the influence of exchange rates on the choice and dynamic adjustment of such strategies. The insights obtained from our modeling analysis are then translated into testable hypotheses and empirically verified with the use of firm level data from U.S. multinational corporations (both at the firm and a more aggregate level). An insightful result of our model is the identification of a hysteresis phenomenon that characterizes switching behavior between strategies in the presence of switchover cost. The magnitude of the hysteresis band, which is a measure of the inertia associated with keeping the current ownership structure, is affected by a multiplicity of factors such as exchange rate volatility and market power of the entering firm. Analytical and numerical results on the effects of such factors on the hysteresis band are provided. The four testable hypotheses generated from our modeling analysis are rigorously tested with the use of a multinomial logit model on data obtained from the Harvard Multinational Enterprise database, and a data set maintained by the Bureau of Economic Analysis, the U.S. Department of Commerce. The empirical results strongly support our insights that relatively depreciated real exchange rates (i.e., weak home currency) favor (a) the JV over the WOS and (b) EXP mode over the WOS or JV. Finally, we summarize our results into useful guidelines for global production managers.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 47 (2001)
Issue (Month): 8 (August)
Production Strategy; International Business; Ownership Structure; Exporting; Joint Ventures; Global Pricing Policy; Hysterisis; Real Options; Exchange Rates; Dynamic Programming;
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Open Access publications from Katholieke Universiteit Leuven
urn:hdl:123456789/121533, Katholieke Universiteit Leuven.
- Belderbos, Rene & Zou, Jianglei, 2006. "Divestment of foreign manufacturing affiliates: country platforms, multinational plant networks, and foreign investor agglomeration," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/121186, Katholieke Universiteit Leuven.
- Belderbos, Rene & Tong, Tony W. & Wu, Shubin, 2012. "Multinationality and downside risk: The contingent roles of option portfolio characteristics and organizational factors," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/355164, Katholieke Universiteit Leuven.
- Axarloglou, Kostas & Visvikis, Ilias & Zarkos, Stefanos, 2012. "The Time Dimension And Value Of Flexibility In Resource Allocation: The Case Of The Maritime Industry," DUTH Research Papers in Economics 2-2012, Democritus University of Thrace, Department of International Economic Relations and Development.
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