Strategic Foreign Direct Investment and Exchange-Rate Uncertainty

Posted: 12 Jan 2001

See all articles by Hongmo Sung

Hongmo Sung

Kyongju University

Harvey E. Lapan

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.

Suggested Citation

Sung, Hongmo and Lapan, Harvey E., Strategic Foreign Direct Investment and Exchange-Rate Uncertainty. Available at SSRN: https://ssrn.com/abstract=241873

Hongmo Sung

Kyongju University

San 42-1
Hyohyun-dong Kyongju
Kyongbok
South Korea

Harvey E. Lapan (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515 294-5917 (Phone)

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