Going multinational under exchange rate uncertainty

Abstract

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.