Market competition, exchange rate uncertainty, and foreign direct investment

Chia‐Ching Lin and Kun‐Ming Chen

Review of Development Economics, 2022, vol. 26, issue 1, 405-422

Abstract: This paper applies a real option game approach to examine the impact of market competition on the timing of foreign direct investment under exchange rate uncertainty both theoretically and empirically. Theoretically, we establish that a more competitive foreign market deters a market‐seeking firm from entering the market earlier if it faces exchange rate uncertainty. By contrast, a more competitive home market might induce a cost‐oriented firm to shift its production to a low‐wage foreign country earlier. A recent survey data set of Taiwanese firm investment into China is employed to assess the validity of our theoretical framework. With event history modeling, our empirical results are generally consistent with our theoretical prediction.

Date: 2022
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