IDEAS home Printed from https://ideas.repec.org/p/gra/wpaper/08-19.html
   My bibliography  Save this paper

Going Multinational under Exchange Rate Uncertainty

Author

Listed:
  • Henry Aray

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

  • Javier Gardeazabal

    (DFAEII - The University of the Basque Country)

Abstract

We analyze a model where an exporting firm competes a la Cournot in a foreign market. The firm faces exchange rate uncertainty and has the option to invest abroad. The paper contributes four results. First, real option pricing techniques are used to derive the optimal timing rule of the investment and the price of the firm and foreign competitors. Second, the sunk cost of entry into the foreign market introduces hysteresis in direct investment flows. We find that the degree of hysteresis grows with the number of firms in the industry. Third, we determine the conditions under which dumping may appear and the role of FDI in precluding this type of dumping. Fourth, tariffs have the well known FDI-inducing effect, more so in less competitive markets, and are more effective at deterring delocation. Furthermore, a tariff might have the effect of triggering dumping.
(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
    as

    Download full text from publisher

    File URL: http://www.ugr.es/~teoriahe/RePEc/gra/wpaper/thepapers08_19.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Brander, James & Krugman, Paul, 1983. "A 'reciprocal dumping' model of international trade," Journal of International Economics, Elsevier, vol. 15(3-4), pages 313-321, November.
    2. Claudia M. Buch & Jörn Kleinert, 2008. "Exchange Rates and FDI: Goods versus Capital Market Frictions," The World Economy, Wiley Blackwell, vol. 31(9), pages 1185-1207, September.
    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. 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.
    5. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring.
    6. Motta, Massimo, 1992. "Multinational firms and the tariff-jumping argument : A game theoretic analysis with some unconventional conclusions," European Economic Review, Elsevier, vol. 36(8), pages 1557-1571, December.
    7. Rafael Rob & Nikolaos Vettas, 2003. "Foreign Direct Investment and Exports with Growing Demand," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(3), pages 629-648.
    8. Bruce A. Blonigen, 2019. "Firm-Specific Assets and the Link Between Exchange Rates and Foreign Direct Investment," World Scientific Book Chapters, in: Foreign Direct Investment, chapter 3, pages 89-120, World Scientific Publishing Co. Pte. Ltd..
    9. XING, Yuqing, 2006. "Why is China so attractive for FDI? The role of exchange rates," China Economic Review, Elsevier, vol. 17(2), pages 198-209.
    10. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    11. 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 111-122, February.
    12. 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.
    13. Poddar, Sougata & Sasaki, Dan, 2002. "The strategic benefit from advance production," European Journal of Political Economy, Elsevier, vol. 18(3), pages 579-595, September.
    14. Sylvia Gottschalk & Stephen Hall, 2008. "Foreign direct investment and exchange rate uncertainty in South-East Asia," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 349-359.
    15. Belderbos, R. & Vandenbussche, H. & Veugelers, R., 2004. "Antidumping duties, undertakings, and foreign direct investment in the EU," European Economic Review, Elsevier, vol. 48(2), pages 429-453, April.
    16. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    17. 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 309-325, October.
    18. Delgado, Francisco A., 1991. "Hysteresis, menu costs, and pricing with random exchange rates," Journal of Monetary Economics, Elsevier, vol. 28(3), pages 461-484, December.
    19. Moreno, Diego & Ubeda, Luis, 2006. "Capacity precommitment and price competition yield the Cournot outcome," Games and Economic Behavior, Elsevier, vol. 56(2), pages 323-332, August.
    20. Nelson, Douglas, 2006. "The political economy of antidumping: A survey," European Journal of Political Economy, Elsevier, vol. 22(3), pages 554-590, September.
    21. Steven R. Grenadier, 2002. "Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms," The Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 691-721.
    22. Paxson, Dean & Pinto, Helena, 2005. "Rivalry under price and quantity uncertainty," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 209-224.
    23. Michael M. Knetter & Thomas J. Prusa, 2021. "Macroeconomic factors and antidumping filings: evidence from four countries," World Scientific Book Chapters, in: Thomas J Prusa (ed.), Economic Effects of Antidumping, chapter 8, pages 153-169, World Scientific Publishing Co. Pte. Ltd..
    24. Davies, Stephen W. & McGuinness, Anthony J., 1982. "Dumping at less than marginal cost," Journal of International Economics, Elsevier, vol. 12(1-2), pages 169-182, February.
    25. Yuqing Xing & Guanghua Wan, 2006. "Exchange Rates and Competition for FDI in Asia," The World Economy, Wiley Blackwell, vol. 29(4), pages 419-434, April.
    26. Thille, Henry, 2006. "Inventories, market structure, and price volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1081-1104, July.
    27. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    28. Sercu, Piet & Vanhulle, Cynthia, 1992. "Exchange rate volatility, international trade, and the value of exporting firms," Journal of Banking & Finance, Elsevier, vol. 16(1), pages 155-182, February.
    29. 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.
    30. 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.
    31. Avinash Dixit, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 205-228.
    32. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    33. Julio J. Rotemberg & Garth Saloner, 1989. "The Cyclical Behavior of Strategic Inventories," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(1), pages 73-97.
    34. Campa, Jose & Donnenfeld, Shabtai & Weber, Shlomo, 1998. "Market Structure and Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 6(3), pages 361-380, August.
    35. Robert Novy-Marx, 2007. "An Equilibrium Model of Investment Under Uncertainty," The Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1461-1502, 2007 29.
    36. Davies, Stephen & Lyons, Bruce, 1996. "Industrial Organization in the European Union: Structure, Strategy, and the Competitive Mechanism," OUP Catalogue, Oxford University Press, number 9780198289739.
    37. 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.
    38. 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 614-622, November.
    39. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
    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. Cao, Jiyun & Mukherjee, Arijit, 2018. "Foreign direct investment, unionised labour markets and welfare," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 330-339.
    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.

    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. Matthias Busse & Carsten Hefeker & Signe Nelgen, 2013. "Foreign Direct Investment and Exchange Rate Regimes," Economics Bulletin, AccessEcon, vol. 33(1), pages 843-858.
    2. Shauna Phillips & Fredoun Z. Ahmadi-Esfahani, 2008. "Exchange rates and foreign direct investment: theoretical models and empirical evidence ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(4), pages 505-525, December.
    3. 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.
    4. Shi Li & Hironobu Nakagawa, 2022. "Exchange rates and foreign direct investment: Evidence from Chinese firm‐level data," The World Economy, Wiley Blackwell, vol. 45(9), pages 2902-2923, September.
    5. Lee, Bong-Soo & Min, Byung S., 2011. "Exchange rates and FDI strategies of multinational enterprises," Pacific-Basin Finance Journal, Elsevier, vol. 19(5), pages 586-603, November.
    6. Warren Moraghen & Boopen Seetanah & Noor Sookia, 2021. "Impact of exchange rate and exchange rate volatility on foreign direct investment inflow for Mauritius: A dynamic time series approach," African Development Review, African Development Bank, vol. 33(4), pages 581-591, December.
    7. Chia‐Ching Lin & Kun‐Ming Chen, 2022. "Market competition, exchange rate uncertainty, and foreign direct investment," Review of Development Economics, Wiley Blackwell, vol. 26(1), pages 405-422, February.
    8. Phillips, Shauna & Ahmadi-Esfahani, Fredoun Z., 2008. "Exchange Rates and Foreign Direct Investment: Theoretical Models and Empirical Evidence," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(4), pages 1-21.
    9. Conconi, Paola & Sapir, André & Zanardi, Maurizio, 2016. "The internationalization process of firms: From exports to FDI," Journal of International Economics, Elsevier, vol. 99(C), pages 16-30.
    10. Zainab Jehan & Azooba Hamid, 2017. "Exchange rate volatility and capital inflows: role of financial development," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 16(3), pages 189-203, December.
    11. Ni, Shawn & Ratti, Ronald A., 2009. "Heterogeneous parameter uncertainty and the timing of investment during crisis," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-22.
    12. Katheryn Russ, 2012. "Exchange rate volatility and first-time entry by multinational firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(2), pages 269-295, June.
    13. Takagi, Shinji & Shi, Zongying, 2011. "Exchange rate movements and foreign direct investment (FDI): Japanese investment in Asia, 1987–2008," Japan and the World Economy, Elsevier, vol. 23(4), pages 265-272.
    14. Jose Brandao de Brito & Felipa de Mello Sampayo, 2005. "The timing and probability of FDI: an application to US multinational enterprises," Applied Economics, Taylor & Francis Journals, vol. 37(4), pages 417-437.
    15. Jung Wan Lee & Tantatape Brahmasrene, 2020. "Exchange Rate Movements and Structural Break on China FDI Inflows," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(2), June.
    16. Jung Wan Lee, 2015. "Dynamic Relationships between Exchange Rates and Foreign Direct Investment: Empirical Evidence from Korea," Asian Economic Journal, East Asian Economic Association, vol. 29(1), pages 73-90, March.
    17. KaSaundra M. Tomlin, 2000. "The Effects of Model Specification on Foreign Direct Investment Models: An Application of Count Data Models," Southern Economic Journal, John Wiley & Sons, vol. 67(2), pages 460-468, October.
    18. Rajesh Chakrabarti & Barry Scholnick, 2002. "Exchange rate expectations and foreign direct investment flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 138(1), pages 1-21, March.
    19. Benjamin N. Dennis & Christopher A. Laincz & Lei Zhu, 2008. "Which Exchange Rates Matter for FDI? Evidence for Japan," Southern Economic Journal, John Wiley & Sons, vol. 75(1), pages 50-68, July.
    20. Vettas, Nikolaos & Kotseva, Rossitsa, 2005. "Foreign Direct Investment and Exports Dynamics with Demand Learning," CEPR Discussion Papers 5262, C.E.P.R. Discussion Papers.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    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:gra:wpaper:08/19. 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: Angel Solano Garcia. (email available below). General contact details of provider: https://edirc.repec.org/data/dtugres.html .

    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.