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Going Multinational under Exchange Rate Uncertainty

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  • Henry Aray

    () (Department of Economic Theory and Economic History, University of Granada.)

  • Javier Gardeazabal

    () (DFAEII - The University of the Basque Country)

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • 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..
  • Handle: RePEc:gra:wpaper:08/19
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    File URL: http://www.ugr.es/~teoriahe/RePEc/gra/wpaper/thepapers08_19.pdf
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    2. A. Can Inci & Bong Soo Lee, 2014. "Dynamic Relations between Stock Returns and Exchange Rate Changes," European Financial Management, European Financial Management Association, vol. 20(1), pages 71-106, January.

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    More about this item

    Keywords

    Foreign Direct Investment; Oligopoly; Real Option; Dumping.;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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