Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty / Linda S. Goldberg, Charles D. Kolstad.

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Goldberg, Linda S

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w4815.Publication details: Cambridge, Mass. National Bureau of Economic Research 1994.Description: 1 online resource: illustrations (black and white)Online resources:

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Abstract: Variable real exchange rates influence the country choice for location of production facilities by a multinational enterprise. With risk averse investors and fixed productive factors, a parent company should not be indifferent to the choice of production capacity location, even when the expected costs of production are identical across countries. If a non-negative correlation exists between real export demand shocks and real exchange rate shocks, the multinational will optimally locate some of its productive capacity abroad. The share of production capacity optimally located abroad increases as exchange rate volatility rises and as export demand shocks become more correlated. These theoretical results are confirmed by empirical analysis of quarterly United States bilateral foreign-direct- investment flows with Canada, Japan, and the United Kingdom.

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Previous	nber w4812 Productivity Measurement for a Distribution Firm /	nber w4813 Retirement Research Using the Health and Retirement Survey /	nber w4814 The Macroeconomics of the Great Depression: A Comparative Approach /	nber w4815 Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty /	nber w4816 Reference Point Dependence for Specification Bias from Quality Upgrading /	nber w4817 Intermediate Goods and Business Cycles: Implications for Productivity and Welfare /	nber w4818 The Time Variation of Risk and Return in Foreign Exchange Markets: A General Equilibrium Perspective /	Next

August 1994.

Variable real exchange rates influence the country choice for location of production facilities by a multinational enterprise. With risk averse investors and fixed productive factors, a parent company should not be indifferent to the choice of production capacity location, even when the expected costs of production are identical across countries. If a non-negative correlation exists between real export demand shocks and real exchange rate shocks, the multinational will optimally locate some of its productive capacity abroad. The share of production capacity optimally located abroad increases as exchange rate volatility rises and as export demand shocks become more correlated. These theoretical results are confirmed by empirical analysis of quarterly United States bilateral foreign-direct- investment flows with Canada, Japan, and the United Kingdom.