IDEAS home Printed from https://ideas.repec.org/a/eee/worbus/v50y2015i3p548-557.html
   My bibliography  Save this article

Operational hedging in foreign direct investments under volatile and divergent exchange rates across countries

Author

Listed:
  • Song, Sangcheol
  • Lee, Seung-Hyun
  • Makhija, Mona

Abstract

This study examines the environmental conditions under which multinational corporations (MNCs) engage in operational hedging behaviors to actualize their operational flexibility within their international network. We analyzed a Korean MNCs' database and found that MNCs engage in operational hedging through global intra-firm trade to counteract volatile and divergent exchange rates across countries. Additionally, we found that the MNCs' utilization of intra-firm trade and flexible responses to volatile and divergent cross-country exchange rates enhances their performance. Our findings support the real options lens perspective of the value of multinational operational flexibility under external uncertainty in an international business setting.

Suggested Citation

  • Song, Sangcheol & Lee, Seung-Hyun & Makhija, Mona, 2015. "Operational hedging in foreign direct investments under volatile and divergent exchange rates across countries," Journal of World Business, Elsevier, vol. 50(3), pages 548-557.
    • Handle: RePEc:eee:worbus:v:50:y:2015:i:3:p:548-557
    DOI: 10.1016/j.jwb.2014.08.012
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1090951614000613
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jwb.2014.08.012?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Linda Allen & Christos Pantzalis, 1996. "Valuation of the operating Flexibility of Multinational Corporations," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 27(4), pages 633-653, December.
    2. Chris Changwha Chung & Seung-Hyun Lee & Paul W Beamish & Takehiko Isobe, 2010. "Subsidiary expansion/contraction during times of economic crisis," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(3), pages 500-516, April.
    3. Darby, Julia, et al, 1999. "The Impact of Exchange Rate Uncertainty on the Level of Investment," Economic Journal, Royal Economic Society, vol. 109(454), pages 55-67, March.
    4. Seung-Hyun Lee & Mona Makhija, 2009. "The effect of domestic uncertainty on the real options value of international investments," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 40(3), pages 405-420, April.
    5. Christos Pantzalis & Betty J Simkins & Paul A Laux, 2001. "Operational Hedges and the Foreign Exchange Exposure of U.S. Multinational Corporations," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 32(4), pages 793-812, December.
    6. Subramanian Rangan, 1998. "Do Multinationals Operate Flexibly? Theory and Evidence," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 29(2), pages 217-237, June.
    7. Vaagen, Hajnalka & Wallace, Stein W., 2008. "Product variety arising from hedging in the fashion supply chains," International Journal of Production Economics, Elsevier, vol. 114(2), pages 431-455, August.
    8. Mona V Makhija & Kwangsoo Kim & Sandra D Williamson, 1997. "Measuring Globalization of Industries Using a National Industry Approach: Empirical Evidence Across Five Countries and over Time," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 28(4), pages 679-710, December.
    9. Tailan Chi, 2000. "Option to acquire or divest a joint venture," Strategic Management Journal, Wiley Blackwell, vol. 21(6), pages 665-687, June.
    10. René Belderbos & Jianglei Zou, 2009. "Real options and foreign affiliate divestments: A portfolio perspective," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 40(4), pages 600-620, May.
    11. Morck, Randall & Yeung, Bernard, 1991. "Why Investors Value Multinationality," The Journal of Business, University of Chicago Press, vol. 64(2), pages 165-187, April.
    12. repec:dgr:rugsom:99e23 is not listed on IDEAS
    13. Masaaki Kotabe & Janet Y Murray, 1990. "Linking Product and Process Innovations and Modes of International Sourcing in Global Competition: A Case of Foreign Multinational Firms," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 21(3), pages 383-408, September.
    14. Seung‐Hyun Lee & Mona Makhija, 2009. "Flexibility in internationalization: is it valuable during an economic crisis?," Strategic Management Journal, Wiley Blackwell, vol. 30(5), pages 537-555, May.
    15. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    16. Jan Hendrik Fisch, 2008. "Investment in new foreign subsidiaries under receding perception of uncertainty," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 39(3), pages 370-386, April.
    17. Dekle, Robert & Ryoo, Heajin H., 2007. "Exchange rate fluctuations, financing constraints, hedging, and exports: Evidence from firm level data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(5), pages 437-451, December.
    18. Stephen J. Kobrin, 1991. "An empirical analysis of the determinants of global integration," Strategic Management Journal, Wiley Blackwell, vol. 12(S1), pages 17-31, June.
    19. Brian Mccann & Timothy Folta, 2009. "Sunk costs, uncertainly and market exit : a real options perspective," Post-Print hal-02312513, HAL.
    20. Guilhem Bascle, 2008. "Controlling for endogeneity with instrumental variables in strategic management research," Post-Print hal-00576795, HAL.
    21. Robert Lensink & Hong Bo & Elmer Sterken, 1999. "Does uncertainty affect economic growth? An empirical analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 135(3), pages 379-396, September.
    22. Vinod K. Aggarwal & Shujiro Urata (ed.), 2002. "Winning in Asia, Japanese Style," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-137-10926-2, March.
    23. Fisch, Jan Hendrik & Zschoche, Miriam, 2011. "Do firms benefit from multinationality through production shifting?," Journal of International Management, Elsevier, vol. 17(2), pages 143-149, June.
    24. Seung‐Hyun Lee & Sangcheol Song, 2012. "Host country uncertainty, intra‐MNC production shifts, and subsidiary performance," Strategic Management Journal, Wiley Blackwell, vol. 33(11), pages 1331-1340, November.
    25. Peter J. Buckley & Mark Casson, 1991. "The Future of the Multinational Enterprise," Palgrave Macmillan Books, Palgrave Macmillan, edition 0, number 978-1-349-21204-0, March.
    26. Mihir A. Desai & C. Fritz Foley & Kristin J. Forbes, 2008. "Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Depreciations," The Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2857-2888, November.
    27. Masaaki Kotabe & Glenn S Omura, 1989. "Sourcing Strategies of European and Japanese Multinationals: A Comparison," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 20(1), pages 113-130, March.
    28. de Meza, David & van der Ploeg, Frederick, 1987. "Production Flexibility as a Motive for Multinationality," Journal of Industrial Economics, Wiley Blackwell, vol. 35(3), pages 343-351, March.
    29. 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 855-873, November.
    30. James E. Hodder, 1984. "Technical Note—Financial Market Approaches to Facility Location under Uncertainty," Operations Research, INFORMS, vol. 32(6), pages 1374-1380, December.
    31. repec:fth:michin:282 is not listed on IDEAS
    32. Charles Y. Tang & Surinder Tikoo, 1999. "Operational flexibility and market valuation of earnings," Strategic Management Journal, Wiley Blackwell, vol. 20(8), pages 749-761, August.
    33. Bruce Kogut, 1991. "Joint Ventures and the Option to Expand and Acquire," Management Science, INFORMS, vol. 37(1), pages 19-33, January.
    34. Jonathan O'Brien & Timothy Folta, 2009. "Sunk costs, uncertainty and market exit: A real options perspective," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 18(5), pages 807-833, October.
    35. Arnd Huchzermeier & Morris A. Cohen, 1996. "Valuing Operational Flexibility Under Exchange Rate Risk," Operations Research, INFORMS, vol. 44(1), pages 100-113, February.
    36. repec:dgr:rugccs:199902 is not listed on IDEAS
    37. Kozo Kiyota & Toshiyuki Matsuura & Shujiro Urata, 2008. "EXCHANGE RATE VOLATILITY AND MNCs' PRODUCTION AND DISTRIBUTION NETWORKS: THE CASE OF JAPANESE MANUFACTURING MNCs," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 53(03), pages 523-538.
    38. Aabo, Tom & Simkins, Betty J., 2005. "Interaction between real options and financial hedging: Fact or fiction in managerial decision-making," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 353-369.
    39. Bruce Kogut & Nalin Kulatilaka, 1994. "Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network," Management Science, INFORMS, vol. 40(1), pages 123-139, January.
    40. Ilya RP Cuypers & Xavier Martin, 2010. "What makes and what does not make a real option? A study of equity shares in international joint ventures," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(1), pages 47-69, January.
    41. Lee, Seung-Hyun & Makhija, Mona & Paik, Yongsun, 2008. "The value of real options investments under abnormal uncertainty: The case of the Korean economic crisis," Journal of World Business, Elsevier, vol. 43(1), pages 16-34, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Song, Sangcheol, 2021. "Do in-network ties help in lowering subsidiary divestment rates under environmental challenges?," Journal of Business Research, Elsevier, vol. 128(C), pages 257-265.
    2. Lee, Hyoungjin & Chung, Chris Changwha, 2022. "Go small or go home: Operational exposure to violent conflicts and foreign subsidiary exit," Journal of World Business, Elsevier, vol. 57(6).
    3. Song, Sangcheol, 2023. "Multinational operational flexibility, within-network redundancy, and downside risks and divestment rates of international investments," International Business Review, Elsevier, vol. 32(1).
    4. Christofi, Michael & Pereira, Vijay & Vrontis, Demetris & Tarba, Shlomo & Thrassou, Alkis, 2021. "Agility and flexibility in international business research: A comprehensive review and future research directions," Journal of World Business, Elsevier, vol. 56(3).
    5. Song, Sangcheol, 2021. "When do multinational corporations adjust production volume flexibly among in-network subsidiaries?," Journal of Business Research, Elsevier, vol. 135(C), pages 532-542.
    6. Qi, Jianhong & Liu, Hui & Zhang, Zhaoyong, 2021. "Exchange rate uncertainty and the timing of Chinese Outward Direct Investment," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1193-1204.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sangcheol Song, 2015. "Inter-Country Exchange Rates and Intra-Firm Trade Flow Within Global Network of Multinational Corporations," Management International Review, Springer, vol. 55(1), pages 1-22, February.
    2. Sangcheol Song, 2013. "FDI Structure, Investment Specificity, and Multinationality Value under Host Market Uncertainty," Management International Review, Springer, vol. 53(6), pages 795-817, December.
    3. Song, Sangcheol, 2015. "Exchange rate challenges, flexible intra-firm adjustments, and subsidiary longevity," Journal of World Business, Elsevier, vol. 50(1), pages 36-45.
    4. Song, Sangcheol, 2014. "Unfavorable Market Conditions, Institutional and Financial Development, and Exits of Foreign Subsidiaries," Journal of International Management, Elsevier, vol. 20(3), pages 279-289.
    5. Sangcheol Song, 2014. "Subsidiary Divestment: The Role of Multinational Flexibility," Management International Review, Springer, vol. 54(1), pages 47-70, February.
    6. Tailan Chi & Jing Li & Lenos G Trigeorgis & Andrianos E Tsekrekos, 2019. "Real options theory in international business," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(4), pages 525-553, June.
    7. Song, Sangcheol, 2022. "Determining investment size and local embeddedness under host market uncertainty and growth rates," International Business Review, Elsevier, vol. 31(2).
    8. Song, Sangcheol, 2021. "Do in-network ties help in lowering subsidiary divestment rates under environmental challenges?," Journal of Business Research, Elsevier, vol. 128(C), pages 257-265.
    9. Sangcheol Song, 2017. "Ownership Increase in International Joint Ventures: The Within- and Across-Country Flexibility Perspective," Management International Review, Springer, vol. 57(1), pages 93-120, February.
    10. Song, Sangcheol, 2023. "Multinational operational flexibility, within-network redundancy, and downside risks and divestment rates of international investments," International Business Review, Elsevier, vol. 32(1).
    11. Song, Sangcheol, 2020. "Actualization of growth potential in international joint ventures: The moderating effects of localization strategies," Journal of World Business, Elsevier, vol. 55(2).
    12. Song, Sangcheol, 2021. "When do multinational corporations adjust production volume flexibly among in-network subsidiaries?," Journal of Business Research, Elsevier, vol. 135(C), pages 532-542.
    13. Song, Sangcheol, 2023. "Portfolio ownership, production shifts, and downside risks: Evidence from Korea," Journal of Business Research, Elsevier, vol. 155(PA).
    14. Sangcheol Song, 2014. "Value and Cost of Multinationality: International Diversification and Real Options Effects," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 8(5), pages 115-125.
    15. Chris Changwha Chung & Seung-Hyun Lee & Jeoung-Yul Lee, 2013. "Dual-Option Subsidiaries and Exit Decisions During Times of Economic Crisis," Management International Review, Springer, vol. 53(4), pages 555-577, August.
    16. Sangcheol Song & Jeoung Yul Lee, 2017. "Relationship with Headquarters and Divestments of Foreign Subsidiaries: The Hysteresis Perspective," Management International Review, Springer, vol. 57(4), pages 545-570, August.
    17. Aabo, Tom & Pantzalis, Christos & Park, Jung Chul, 2016. "Multinationality as real option facilitator — Illusion or reality?," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 1-17.
    18. Han Smit & Enrico Pennings & Sjoerd Bekkum, 2017. "Real options and institutions," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(5), pages 620-644, July.
    19. HoWook Shin & Seung-Hyun Lee, 2019. "Economic crisis, intra-MNC production shifts and MNC performance from a network perspective," Asia Pacific Journal of Management, Springer, vol. 36(1), pages 185-217, March.
    20. Pandher, Gurupdesh & Sun, Jerry, 2023. "Firm performance & effective mitigation of adverse business scenarios," Global Finance Journal, Elsevier, vol. 58(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:worbus:v:50:y:2015:i:3:p:548-557. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/620401/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.