Strategic Foreign Direct Investment and Exchange Rate Uncertainty

Hongmo Sung and Harvey Lapan

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: We investigate how exchange-rate uncertainty affects the foreign direct investment decision of a risk-neutral multinational firm (MNF). We assume the firm can open plants, each with decreasing average costs, in two different countries. Under certainty, the MNF would open only one plant. We demonstrate that with sufficient exchange-rate volatility, the firm can increase expected profits by opening several plants. We also show that if the MNF faces a competitor in the foreign market, the exchange risk, by inducing the MNF to open plants in both markets, may prevent entry by the local competitor.

Date: 2000-05-01
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Published in International Economic Review, May 2000, vol. 41 no. 2, pp. 411-423

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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:1335

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