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Effects of Exchange Rate Volatility on Behaviors of Affliate Firms in a Foreign Oligopoly under the Revision of Supply Chains

Author

Listed:
  • Tetsuya Shinkai

    (School of Economics, Kwansei Gakuin University)

  • Takao Ohkawa

    (Faculty of Economics, Ritsumeikan University)

  • Makoto Okamura

    (Faculty of Economics, Gakushuin University)

  • Ryoma Kitamura

    (Faculty of Economics, Otemon Gakuin University)

Abstract

This paper investigates the changes in exchange rate volatility on an international oligopolistic market in a foreign country that accepts n affiliate firms through foreign direct investment (FDI) from a home country. Under the revision of the supply chains of essential products such as high-tech products, the affiliate firms are forced to procure their essential intermediate products from firms in their home country, even though they are expensive. We derive a Cournot equilibrium of the oligopolistic foreign market, in which affiliate firms compete with foreign firms under foreign exchange rate uncertainty when the number of affiliates, n, is exogenously given. In the equilibrium, we show the affiliate firms/the foreign firms aggressively expand their outputs when the relative risk aversion coefficient is large /small at equilibrium. Affiliate firms may earn ex-post expected profits less than the expected profits of the foreign firms even when the relative risk aversion coefficient is small at equilibrium. However, whether the change in the foreign exchange rate may be profitable for the ex-post profits of the affiliate and parent firms is indeterminate.

Suggested Citation

  • Tetsuya Shinkai & Takao Ohkawa & Makoto Okamura & Ryoma Kitamura, 2023. "Effects of Exchange Rate Volatility on Behaviors of Affliate Firms in a Foreign Oligopoly under the Revision of Supply Chains," Discussion Paper Series 249, School of Economics, Kwansei Gakuin University.
    • Handle: RePEc:kgu:wpaper:249
    as

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    References listed on IDEAS

    as
    1. 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 411-423, May.
    2. Brander, James A. & Spencer, Barbara J., 1987. "Foreign direct investment with unemployment and endogenous taxes and tariffs," Journal of International Economics, Elsevier, vol. 22(3-4), pages 257-279, May.
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    More about this item

    Keywords

    risk aversion; exchange rate volatility; affiliate firms; foreign oligopolistic market; revision of supply chains;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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