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Going Multinational under Exchange Rate Uncertainty

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Author Info
Henry Aray () (Universidad del País Vasco)
Javier Gardeazábal () (Universidad del País Vasco)

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Abstract

A domestic exporting firm faces exchange rate uncertainty and has the option to install capacity abroad, thus becoming multinational. We analyze when the firm should exercise such an option optimally in the context of a Cournot market equilibrium. There are four main findings. First, the degree of hysteresis in foreign direct investment (FDI) grows as the number of firms increases. Second, a maintenance cost may induce the exporting firm to sustain losses, i.e. dumping. Third, the FDI-inducing effect of tariffs is decreasing in the number of firms. Fourth, FDI reduces exchange rate pass-through, especially for the range of exchange rate values that would otherwise have been maximal.

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Paper provided by University of the Basque Country - Department of Foundations of Economic Analysis II in its series DFAEII Working Papers with number 200505.

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Date of creation: 24 Feb 2005
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Handle: RePEc:ehu:dfaeii:200505

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Postal: Dpto. de Fundamentos del Análisis Económico II, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Related research
Keywords: Foreign Direct Investment; Option Pricing; Exchange rate volatility;

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Find related papers by JEL classification:
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
F31 - International Economics - - International Finance - - - Foreign Exchange

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    Other versions:
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  6. Brouwer, Jelle & Paap, Richard & Viaene, Jean-Marie, 2008. "The trade and FDI effects of EMU enlargement," Journal of International Money and Finance, Elsevier, vol. 27(2), pages 188-208, March. [Downloadable!] (restricted)
    Other versions:
  7. Shrikhande, Milind M, 2002. "A General Equilibrium Analysis of Foreign Direct Investment and the Real Exchange Rate," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(4), pages 309-25, October. [Downloadable!] (restricted)
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  14. Goldberg, Linda S & Kolstad, Charles D, 1995. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 855-73, November. [Downloadable!] (restricted)
    Other versions:
  15. Levitan, Richard & Shubik, Martin, 1972. "Price Duopoly and Capacity Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 111-22, February. [Downloadable!] (restricted)
    Other versions:
  16. Nelson, Douglas, 2006. "The political economy of antidumping: A survey," European Journal of Political Economy, Elsevier, vol. 22(3), pages 554-590, September. [Downloadable!] (restricted)
  17. Lee, Kyung-Ho & Mah, Jai S., 2003. "Institutional changes and antidumping decisions in the United States," Journal of Policy Modeling, Elsevier, vol. 25(6-7), pages 555-565, September. [Downloadable!] (restricted)
  18. Claudia M. Buch & Jörn Kleinert, 2008. "Exchange Rates and FDI: Goods versus Capital Market Frictions," The World Economy, Blackwell Publishing, vol. 31(9), pages 1185-1207, 09. [Downloadable!] (restricted)
  19. Poddar, Sougata & Sasaki, Dan, 2002. "The strategic benefit from advance production," European Journal of Political Economy, Elsevier, vol. 18(3), pages 579-595, September. [Downloadable!] (restricted)
  20. Russ, Katheryn Niles, 2007. "The endogeneity of the exchange rate as a determinant of FDI: A model of entry and multinational firms," Journal of International Economics, Elsevier, vol. 71(2), pages 344-372, April. [Downloadable!] (restricted)
  21. Campa, Joe Manuel, 1993. "Entry by Foreign Firms in the United States under Exchange Rate Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 614-22, November. [Downloadable!] (restricted)
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