Capacity Choice, Foreign Trade and Exchange Rates

Alpay Filiztekin () and Benan Z. Orbay
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Benan Z. Orbay: Istanbul Technical University

International Trade from EconWPA

Abstract: We investigate the effects of exchange rate movements on investment decisions of firms in an oligopolistic market. In a two-country-world model, we focus on the capacity investment decisions of small (small initial capacity and high marginal cost) and large (large initial capacity and low marginal cost) domestic firms. Both type of firms use foreign inputs in production and sell their output in the foreign market, thus they are prone to changes in exchange rate from both cost and demand side. Results show that devaluations alter the composition of production and the relative share of small and inefficient firms at the expense of large and efficient firms in the economy. The investment response to exchange rates is more pronounced in more competitive markets.

Keywords: Capacity investment; exchange rates; market structure. (search for similar items in EconPapers)
JEL-codes: F1 F2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: Written 2005-01-28
Note: Type of Document - pdf; pages: 15

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