Going Multinational under Exchange Rate Uncertainty

Henry Aray () and Javier Gardeazabal ()

DFAEII Working Papers from University of the Basque Country - Department of Foundations of Economic Analysis II

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.

Keywords: Foreign Direct Investment; Option Pricing; Exchange rate volatility (search for similar items in EconPapers)
JEL-codes: F23 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2005-02-24

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Working Paper: Going Multinational under Exchange Rate Uncertainty (2008)
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Dpto. de Fundamentos del Análisis Económico II, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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