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Exchange rate volatility and first-time entry by multinational firms

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  • Katheryn Russ

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Abstract

Using a model with upfront sunk costs, heterogeneous firms, and endogenous exchange rates, this paper demonstrates theoretically that volatility in fundamental variables such as the nominal interest rate that drive exchange rate volatility can simultaneously impact the entry behavior of multinational firms through a relative price channel unrelated to exchange rate risk. It then provides an empirical illustration of the bias this endogeneity can cause when regressing measures of foreign direct investment on exchange rate volatility. It is the first paper to provide empirical evidence that interest rate volatility may influence the behavior of multinational firms.

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Bibliographic Info

Article provided by Springer in its journal Review of World Economics.

Volume (Year): 148 (2012)
Issue (Month): 2 (June)
Pages: 269-295

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Handle: RePEc:spr:weltar:v:148:y:2012:i:2:p:269-295

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Related research

Keywords: Exchange rate variability; Foreign direct investment; Uncertainty; Mergers and acquisitions; F1; F2; F4;

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References

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Citations

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Cited by:
  1. Claudia Buch & Iris Kesternich & Alexander Lipponer & Monika Schnitzer, 2014. "Financial constraints and foreign direct investment: firm-level evidence," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 150(2), pages 393-420, May.
  2. repec:fip:fedreq:y:2012:i:1q:p:51-76:n:vol.98no.1 is not listed on IDEAS
  3. Cavallari, Lilia, 2013. "Firms' entry, monetary policy and the international business cycle," Journal of International Economics, Elsevier, vol. 91(2), pages 263-274.
  4. Phillips, Shauna & Ahmadi-Esfahani, Fredoun Z., . "Exchange Rates and Foreign Direct Investment: Theoretical Models and Empirical Evidence," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society.
  5. Mauro Ghinamo & Paolo Panteghini & Federico Revelli, 2007. "FDI Determination and Corporate Tax Competition in a Volatile World," CESifo Working Paper Series 1965, CESifo Group Munich.
  6. Cavallari, Lilia & D'Addona, Stefano, 2012. "Business cycle determinants of US foreign direct investments," MPRA Paper 43616, University Library of Munich, Germany.
  7. Philip R. Lane, 2008. "EMU and Financial Integration," The Institute for International Integration Studies Discussion Paper Series iiisdp272, IIIS.
  8. Thomas A. Lubik & Katheryn N. Russ, 2012. "Exchange rate volatility in a simple model of firm entry and FDI," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 51-76.

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