Transparency in the Foreign Exchange Market and the Volume of International Trade

In this paper we study the impact of more transparency in the foreign exchange market on the ex ante expected volume of international trade. Transparency is measured by the informational content of publicly observable signals. These signals convey information about the use of policy instruments which affect the future exchange rate. We find that a higher level of transparency may increase or decrease the volume of international trade. In particular, the impact of greater transparency depends on the curvature of the firms’ marginal cost function. Furthermore, the firms’ex ante expected profits are higher when the foreign exchange market is more transparent.     

Export-Flexible Firms and Forward Markets

This paper examines the production and hedging decisions of an exporting firm under exchange rate uncertainty. The firm is export flexible in that it can distribute its output to either the domestic market or a foreign market, after observing the realized spot exchange rate. The firm is a monopoly in the domestic market but a price-taker in the foreign market. It is shown that the separation theorem holds if selling exclusively in the domestic market is suboptimal even under the most unfavorable sport exchange rate. Otherwise, the firm's optimal output depends on its preference and on the underlying exchange rate uncertainty. Furthermore, the export-flexible firm underhedges its exchange rate risk exposure in a currency forward market wherein the forward exchange rate contains a non-positive risk premium. [D21, F31]     

Currency Hedging For Export-Flexible Firms *

This paper examines the production and hedging decisions of a competitive exporting firm under exchange rate uncertainty. The firm possesses export flexibility in that it can distribute its output to either the domestic market or a foreign market, after observing the true realization of the exchange rate. It is shown that the separation theorem does not hold under export flexibility, i.e., the firm's optimal output depends on the firm's preference and on the underlying exchange rate uncertainty. Furthermore, the export- flexible firm underhedges its exchange rate risk exposure in a currency forward market where in the forward exchange rate contains a non-positive risk premium. [D21, F31]     

The Impact of Regret on Exports

We examine optimal production and export decisions of a firm facing exchange rate uncertainty, where the firm's management is not only risk averse but also regret averse, i.e., is characterized by a utility function that includes disutility from having chosen ex post suboptimal alternatives. Experimental and empirical results support the view that managers tend to be regret averse. Under regret aversion a negative risk premium need not preclude the firm from exporting which would be the case if the firm were only risk averse. Exporting creates an implicit hedge against the possibility of regret when the realized spot exchange rate turns out to be high. The regret‐averse firm as such has a greater ex ante incentive to export than the purely risk averse firm. Finally, we use a two‐state example to illustrate that the firm optimally exports more (less) to the foreign country than in the case of pure risk aversion if the low (high) spot exchange rate is more likely to prevail. Regret aversion as such plays a crucial role in determining the firm's optimal allocation between domestic sales and foreign exports.     

Welfare Effects of Transparency in Foreign Exchange Markets: the Role of Hedging Opportunities

The paper studies the impact of more transparency on the risk‐sharing opportunities in the foreign exchange market and the associated implications on ex ante welfare. Transparency is measured in this model by the informational content of publicly observable signals about exchange rate developments. The authors find that in this model more transparency improves welfare in economies that are poorly endowed with capital and/or where investors are not very risk‐averse, while welfare is reduced in economies with large capital endowments and/or where investors are highly risk‐averse.     

Multinationals,Information Update,and Product Adaptation *

This paper develops a dynamic model of decision making by multinational firms. The firm chooses between exporting and producing abroad when it expands the market. Bayes learning is incorporated into this model in addition to fixed cost and transport cost Production in a foreign country gives the firm new information about the demand function. This information is applied to adjust the firm's expectation as well as output choice in the future. This process not only reduces the risk encountered by a firm in a foreign market, but also increases acceptance of the product which the firm manufactures. This paper concludes even if producing abroad loses money in the first period, the firm may still choose to set up plants in foreign countries rather than exporting, due to the dynamic information advantage associated with going multinational. [F23,F21]     

Exports and Indirect Hedging of Foreign Currency Risk

We present a model of a risk-averse competitive exporting firm under exchange rate risk. Direct hedging instruments are not available. However, there are domestic assets whose prices are correlated to the foreign currency. We consider a market for futures contracts in these domestic assets and investigate the firm's indirect hedging and export policy. It is shown that the availability of many financial instruments correlated with foreign exchange may, under some circumstances, provide the same results as a perfect hedge.
JEL Classification Numbers: F21, F31.     

Export market participation with sunk costs and firm heterogeneity

In this article we investigate the importance of sunk costs, firm characteristics and spillovers from nearby exporters on a firm's decision to participate in exporting. The empirical analysis involves the estimation of a nonstructural, discrete choice, dynamic model with firm heterogeneity. By using panel data for Estonian companies from 1994 to 1999 we find that: (i) both sunk costs and observable firm characteristics are important determinants of export market participation; (ii) previous history matters, in that, if a firm has been exporting the previous period or the period before, it significantly increases the likelihood of the firm exporting in the current period; (iii) larger firms with high capital intensity and foreign ownership are more likely to be exporters; (iv) operating in an export-oriented industry increases a firm's likelihood of exporting.     

Managing Foreign Direct Investment: Commitment, Deterrence, And Diversion

The paper models the multinational choice between foreign direct investment in and exporting to a domestic market as an equilibrium outcome of strategic play between domestic and foreign firms. Two cases are considered, one in which the domestic firm can precommit to output levels (as, for example, through investment in a distribution network), and one in which such precommitment is not possible. The domestic firm's strategy in the case of precommitment includes aggressive efforts to deter or divert foreign investment and results in fewer observed equilibria with foreign investment than would otherwise occur. Tariffs designed to switch the foreign decision from exporting to direct investment may lead instead to monopolization of the market by the domestic firm.     

TRADE POLICY AND MARKET POWER: FIRM‐LEVEL EVIDENCE

This article identifies the effect of trade policy on market power through new data and a new identification strategy. We identify market power by observing how exporting firms price discriminate across markets following variations in bilateral exchange rates. Pricing‐to‐market is prevalent in all countries in our sample, even among small firms, although it is increasing in firm size. More importantly, we find that the effect of nontariff measures (NTMs) is not isomorphic to that of tariffs. Whereas tariffs reduce the market power of foreign firms through rent‐shifting effects, NTMs reinforce the market power of nonexiting firms, domestic and foreign alike.     

THE EFFECT OF FORWARD MARKETS ON MULTINATIONAL FIRMS

This paper presents a model of a risk averse multinational firm under exchange rate risk. The firm, which owns and controls assets in two countries, is engaged in production, sales and forward contracting whenever forward markets exist. First, we investigate the effects of exchange rate uncertainty without any risk sharing markets. It is shown that the firm internalizes missing hedging markets by increasing foreign production and lowering foreign sales. Therefore the firm hedges by repatriating foreign profits in the form of goods. Second, the implications of the existence of forward markets of global market decisions are discussed. It is shown that a separation theorem holds. This does not imply that the multinational firm shifts all the risk into the forward exchange market.     

OPTIMAL EXPORT AND HEDGING DECISIONS WHEN FORWARD MARKETS ARE INCOMPLETE

This paper examines the behaviour of the competitive firm that exports to two foreign countries under multiple sources of exchange rate uncertainty. There is a forward market between the home currency and one foreign country's currency, but there are no hedging instruments directly related to the other foreign country's currency. We show that the separation theorem holds when the firm optimally exports to the foreign country with the currency forward market. The full‐hedging theorem holds either when the firm exports exclusively to the foreign country with the currency forward market or when the relevant spot exchange rates are independent. In the case that the relevant spot exchange rates are positively (negatively) correlated in the sense of regression dependence, the firm optimally opts for a short (long) forward position for cross‐hedging purposes.     

Unionization and International Market Share Rivalry: A Paradox

Two exporting firms (domestic and foreign) are considered which are symmetric in all respects except that one is unionized while the other faces a competitive labor market. Under free trade the unionized firm has the lower market share. Paradoxically, in the policy equilibrium, the unionized firm has the larger market share. Consequently, the nation hosting the unionized firm has the higher welfare level.     

Export Flexibility And Currency Hedging*

This article studies the behavior of an export‐flexible firm under exchange rate uncertainty. We show that the separation theorem holds if selling exclusively in the domestic market is suboptimal even under the most unfavorable spot exchange rate. Otherwise, the firm's optimal output depends on its preferences and on the underlying uncertainty. We further show that the full‐hedging theorem holds only when the firm always finds it optimal to sell its entire output in the foreign market. Otherwise, export flexibility introduces a convexity into the firm's foreign exchange risk exposure, which calls for the use of currency options for hedging purposes.     

Quota-Induced Cycles

We present a new framework to compare the dynamic effect of tariffs and quotas in the presence of oligopoly. Suppose that the domestic and the foreign firm play a quantity-setting game over time in a perfectly stationary economy. A Markov-perfect equilibrium has the foreign firm exporting at the constant rate under a tariff. In contrast, under the quota the rate of exports changes monotonically over the course of each year, causing seasonal fluctuations in domestic production. Quota-induced cycles can make dynamic market segmentation possible and raise profits for both the firms above what they earn under the equal-import tariff.     

Currency Options and Export-Flexible Firms

This paper examines the production and hedging decisions of a globally competitive firm under exchange rate uncertainty. The firm is risk averse and possesses export flexibility in that it can distribute its output to either the domestic market or a foreign market after observing the realized spot exchange rate. To hedge against its exchange rate risk exposure, the firm can trade fairly priced currency call options of an arbitrary strike price. We show that both the separation and the full‐hedging results hold if the strike price of the currency call options is set equal to the ratio of the domestic and foreign selling prices. Otherwise, neither result holds. Specifically, we show that the optimal level of output is always less than that of an otherwise identical firm that is risk neutral. Furthermore, an under‐hedge (over‐hedge) is optimal whenever the strike price of the currency call options is below (above) the ratio of the domestic and foreign selling prices.     

Does the traditional exchange rate fully explain firms’ exposure?

This study aims to explore the role of the cross exchange rate as a form of market competition, which has previously been omitted as an explanatory variable in estimating the risk exposure of the standard exchange. To the end, we develop a model of exporting firms that reflects exposure to market interaction and mark-up in a duopolistic export market. Using monthly data of stock returns and cross exchange rates of two oligopoly industries (i.e. semiconductor and steel & iron), our empirical evidence supports our hypothesis that cross exchange rates significantly explain firm value.     

Reaching up and reaching out: The impact of competition on firms’ productivity and export decisions

Using firm‐level data from 139 countries, this paper investigates the effect of competition in both the domestic and foreign markets on firm productivity and export decisions. Applying a sample selection endogenous treatment (SSET) Poisson model that tackles both the issue of endogenous sample selection and endogenous treatment at the same time, we document robust evidence that strong competition in the domestic market propels firms to be more productive, and decreasing domestic competition increases firms’ propensity to export. However, firms’ export intensity (i.e. how much they export) is not directly influenced by competition in the domestic market. Moreover, lower competition in the foreign market increases the propensity of domestic firms to export, enlarging the set of exporting firms to include firms with relatively smaller export amounts.     

Power in the multinational corporation in industry equilibrium

Recent theories of the multinational corporation introduce the property rights model of the firm and examine whether to integrate or outsource firm activities locally or to a foreign country. This paper focuses instead on the internal organization of the multinational corporation by examining the power allocation between headquarters and subsidiaries. We provide a framework to analyse the interaction between the decision to serve the local market by exporting or FDI, market access and the optimal mode of organization of the multinational corporation. We find that subsidiary managers are given decision power to run the firm at intermediate levels of host country competition. We then provide comparative statics on the optimal organization of the multinational corporation for changes in fixed FDI entry costs, trade costs, as well as changes in information technology.      

基于成本信息缺失的VER政策与社会福利分析

文章在贸易主体间成本信息缺失的基础上,重新探讨了VER的政策含义。研究结果发现,在本国对外国厂商成本信息缺失的情境下,若产品市场为Cournot竞争,则VER将对两国产生实质的影响:对出口国而言,不论其厂商为何种类型,此时的VER政策都是非自愿的;本国的福利变化则需视出口厂商的类型而定。而在Bertrand竞争下,VER只在出口厂商为高成本类型时方对出口国有利,且不论外国厂商为何种类型,VER皆无法使两国同时获利。