Market competition, exchange rate uncertainty, and foreign direct investment

This paper applies a real option game approach to examine the impact of market competition on the timing of foreign direct investment under exchange rate uncertainty both theoretically and empirically. Theoretically, we establish that a more competitive foreign market deters a market‐seeking firm fr...

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Bibliographic Details
Published in:Review of development economics 2022-02, Vol.26 (1), p.405-422
Main Authors: Lin, Chia‐Ching, Chen, Kun‐Ming
Format: Article
Language:English
Subjects:
event history modeling
exchange rate uncertainty
foreign direct investment
Foreign exchange rates
Foreign investment
real options
Uncertainty
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Summary:This paper applies a real option game approach to examine the impact of market competition on the timing of foreign direct investment under exchange rate uncertainty both theoretically and empirically. Theoretically, we establish that a more competitive foreign market deters a market‐seeking firm from entering the market earlier if it faces exchange rate uncertainty. By contrast, a more competitive home market might induce a cost‐oriented firm to shift its production to a low‐wage foreign country earlier. A recent survey data set of Taiwanese firm investment into China is employed to assess the validity of our theoretical framework. With event history modeling, our empirical results are generally consistent with our theoretical prediction.
ISSN:1363-6669
1467-9361
DOI:10.1111/rode.12813