Strategic Foreign Direct Investment and Exchange Rate Uncertainty

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Strategic Foreign Direct Investment and Exchange Rate Uncertainty

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Sung, Hongmo
Lapan, Harvey

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Harvey E. Lapan

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.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 1335.

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Date of creation: 07 Apr 1999
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Publication status: Published in International Economic Review, May 2000, Vol. 41, No. 2, pp. 411-423.
Handle: RePEc:isu:genres:1335

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Article
- Sung, Hongmo & Lapan, Harvey E, 2000. "Strategic Foreign Direct Investment and Exchange-Rate Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 411-23, May.

Find related papers by JEL classification:
C6 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming
F1 - International Economics - - Trade
F2 - International Economics - - International Factor Movements and International Business
D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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Hisham Foad, 2005. "Currency Unions, Options, and Foreign Direct Investment," Emory Economics 0516, Department of Economics, Emory University (Atlanta). [Downloadable!]
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Henry Aray, 2007. "International Monopoly under Uncertainty," ThE Papers 07/05, Department of Economic Theory and Economic History of the University of Granada.. [Downloadable!]
Dewit, Gerda & Leahy, Dermot & Montagna, Catia, 2003. "Employment Protection and Globalization in Dynamic Oligopoly," CEPR Discussion Papers 3871, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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- Dewit, Gerda & Dermot Leahy & Catia Montagna, 2003. "Employment protection and globalisation in dynamic oligopoly," Royal Economic Society Annual Conference 2003 57, Royal Economic Society. [Downloadable!]
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)
David Sapsford & David Griffiths, 2003. "Foreign direct investment in Mexico," Working Papers 000054, Lancaster University Management School, Economics Department. [Downloadable!]

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