THE CHOICE OF FOREIGN PRODUCTION STRATEGY AND TIMING OF DECISION AMONG THREE COUNTRIES UNDER EXCHANGE RATE UNCERTAINTY

Cheng-Ru Wu () and Chin-Tsai Lin ()
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Cheng-Ru Wu: Graduate Institute of Business and Management, Yuanpei University of Science and Technology, 306 Yuanpei St., Hsin Chu 300, Taiwan, R.O.C.
Chin-Tsai Lin: Graduate Institute of Business and Management, Yuanpei University of Science and Technology, 306 Yuanpei St., Hsin Chu 300, Taiwan, R.O.C.

Asia-Pacific Journal of Operational Research (APJOR), 2004, vol. 21, issue 04, 499-516

Abstract: This study considers the effects of two real exchange rates on strategies that govern the locations of production by firms that are entering two foreign countries. The batch process production model of Lin and Wu (Asia-Pacific Journal of Operational Research, 21, 2004, 35–52), which considers two locations of production, one in each of two countries is extended to develop a decision valuation model to choose the two optimal locations to produce a good — one in each country. This extended model applies the Real Options Analysis (ROA) to determine the value of locating production in three countries. Moreover, a closed-form solution to the Continuous-Time Model Optimization Problem is derived. The optimal entry trigger and expected arrival time of an exporter from country-0 to country-1 or 2 are calculated; a sensitivity analysis is performed, and some characteristic strategies of the operating method for the Cobb–Douglas batch process model among three countries are determined. A useful summary of insights is provided for global managers.

Keywords: Batch process; multinational countries; production strategy; international business; two exchange rates; real options (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1142/S0217595904000369

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