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Exchange Rate Volatility and First-Time Entry by Multinational Firms
| Citations: | 2 - 0 self |
BibTeX
@MISC{Russ_exchangerate,
author = {Katheryn Niles Russ},
title = {Exchange Rate Volatility and First-Time Entry by Multinational Firms},
year = {}
}
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Abstract
The model and related empirical examination in this paper explain why previous studies document both positive and negative correlations between exchange rate volatility and observed levels of foreign direct investment. Using a simple model of cross-border mergers and acquisitions, it argues that the source of the volatility is important, as the covariance between the value of the host country’s exchange rate and demand in the host country for goods produced by resident affiliates of foreign multinational firms differs according to whether interest rate volatility generating exchange rate risk arises in the source or host country. Regressions using data on entry by individual firms reveal that one-time sunk costs are an important engine through which heterogeneous firms respond to exchange rate risk generated by interest rate volatility. They also reveal a large and positive “euro effect ” on the number of first-time cross-border mergers within the European Monetary Union, even when controlling for domestic merger activity.
Keyphrases
exchange rate volatility first-time entry multinational firm interest rate volatility host country important engine resident affiliate observed level foreign direct investment one-time sunk cost domestic merger activity host country exchange rate positive euro effect previous study heterogeneous firm first-time cross-border merger negative correlation related empirical examination exchange rate risk arises simple model rate risk individual firm cross-border merger foreign multinational firm differs european monetary union
