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Strategic Foreign Direct Investment and Exchange‐Rate Uncertainty[Note 1. We are grateful for very helpful comments from two ...]
Author(s) -
Sung Hongmo,
Lapan Harvey E.
Publication year - 2000
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.00069
Subject(s) - foreign direct investment , exchange rate , multinational corporation , monetary economics , volatility (finance) , certainty , business , economics , international economics , financial economics , finance , macroeconomics , philosophy , epistemology
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.