Going multinational under exchange rate uncertainty
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Universidad de Granada. Departamento de Teoría e Historia Económica
Foreign direct investmentOligopolyReal optionDumping
Aray, H.; Gardeazabal, J. Going multinational under exchange rate uncertainty. Universidad de Granada. Departamento de Teoría e Historia Económica (2008). (The Papers; 08/19). [http://hdl.handle.net/10481/31544]
SponsorshipFinancial support from Spanish Ministry of Education and Science (grant SEJ2006-0630) and BBVA foundation is acknowledged.
When an exporting firm should exercise the option to invest abroad under exchange rate uncertainty in the context of a Cournot market equilibrium is analyzed. The model shows that the degree of histeresis in direct investment grows with the number of firms in the industry. We compute the market value of the domestic fir and foreign competitors taking into account the effect of the option held by the domestic producer. When there are sunk maintenance costs and the number of firms is close to the long run equilibrium number of firms, there may be dumping for a range of exchange rate values. Tariffs have the well known FDI-inducing effect, more so in less competitive markets, and are more effective at deterring delocation. A tariff might the undesired effect of inducing dumping.