Exchange Rates and the Choice of Ownership Structure of Production Facilities

Panos Kouvelis (), Kostas Axarloglou () and Vikas Sinha ()
Additional contact information
Panos Kouvelis: Olin School of Business, Washington University, St. Louis, Missouri 63130
Kostas Axarloglou: Economics Division, Babson College, Babson Park, Massachusetts 02457
Vikas Sinha: Fuqua School of Business, Duke University, Durham, North Carolina 27708

Management Science, 2001, vol. 47, issue 8, 1063-1080

Abstract: The aim of this research is to study the effects of real exchange rates on the long-term ownership strategies of production facilities of firms entering foreign markets. Among the strategies considered are exporting (EXP), joint ventures with local partners (JV), and wholly owned production facilities (WOS) in the foreign country. Our research takes a first step in modeling the influence of exchange rates on the choice and dynamic adjustment of such strategies. The insights obtained from our modeling analysis are then translated into testable hypotheses and empirically verified with the use of firm level data from U.S. multinational corporations (both at the firm and a more aggregate level). An insightful result of our model is the identification of a hysteresis phenomenon that characterizes switching behavior between strategies in the presence of switchover cost. The magnitude of the hysteresis band, which is a measure of the inertia associated with keeping the current ownership structure, is affected by a multiplicity of factors such as exchange rate volatility and market power of the entering firm. Analytical and numerical results on the effects of such factors on the hysteresis band are provided. The four testable hypotheses generated from our modeling analysis are rigorously tested with the use of a multinomial logit model on data obtained from the Harvard Multinational Enterprise database, and a data set maintained by the Bureau of Economic Analysis, the U.S. Department of Commerce. The empirical results strongly support our insights that relatively depreciated real exchange rates (i.e., weak home currency) favor (a) the JV over the WOS and (b) EXP mode over the WOS or JV. Finally, we summarize our results into useful guidelines for global production managers.

Keywords: Production Strategy; International Business; Ownership Structure; Exporting; Joint Ventures; Global Pricing Policy; Hysterisis; Real Options; Exchange Rates; Dynamic Programming (search for similar items in EconPapers)
Date: 2001
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.47.8.1063.10227 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:47:y:2001:i:8:p:1063-1080

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().