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Exports versus multinational production under nominal uncertainty

Logan Lewis ()

Journal of International Economics, 2014, vol. 94, issue 2, 371-386

Abstract: This paper examines how nominal uncertainty affects the choice that firms face to serve a foreign market through exports or to produce abroad as a multinational. I develop a two-country, stochastic general equilibrium model in which firms make production and pricing decisions in advance, and I consider its implications for the relative attractiveness of exporting and multinational production. I find that when multinational sales are priced in the local currency while exports are priced in the producer currency, destination volatility benefits exporters: during a foreign nominal contraction, the foreign exchange rate appreciates, causing exports to be relatively cheaper. Exporters gain non-linearly through demand, making profit convex in prices. As foreign volatility rises, the model implies that the home country should serve the foreign country relatively more through exports. I take this implication to bilateral U.S. data, using inflation volatility as a proxy for nominal volatility. Using sectoral data on sales by majority-owned foreign affiliates matched with U.S. exports, I find that higher inflation volatility is associated with a significantly lower ratio of multinational sales to total foreign sales.

Keywords: Multinational production; Nominal uncertainty; Proximity-concentration (search for similar items in EconPapers)
JEL-codes: F12 F23 F41 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Exports versus multinational production under nominal uncertainty (2011) Downloads
Working Paper: Exports versus Multinational Production under Nominal Uncertainty (2011) Downloads
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DOI: 10.1016/j.jinteco.2014.06.007

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