Exchange rates and the choice of ownership structure of production facilities

The aim of this research is to study the effects of real exchange rates on the long-term ownership strategies of production facilities of firms enteri ng foreign markets. Among the strategies considered are exporting (EXP), jo int ventures with local partners (JV), and wholly owned production faciliti es (WOS) in the foreign country. Our research takes a first step in modelin g the influence of exchange rates on the choice and dynamic adjustment of s uch strategies. The insights obtained from our modeling analysis are then t ranslated into testable hypotheses and empirically verified with the use of firm level data from U.S. multinational corporations (both at the firm and a more aggregate level). An insightful result of our model is the identifi cation of a hysteresis phenomenon that characterizes switching behavior bet ween strategies in the presence of switchover cost. The magnitude of the hy steresis band, which is a measure of the inertia associated with keeping th e current ownership structure, is affected by a multiplicity of factors suc h as exchange rate volatility and market power of the entering firm. Analyt ical and numerical results on the effects of such factors on the hysteresis band are provided. The four testable hypotheses generated from our modelin g analysis are rigorously tested with the use of a multinomial logit model on data obtained from the Harvard Multinational Enterprise database, and a data set maintained by the Bureau of Economic Analysis, the U.S. Department of Commerce. The empirical results strongly support our insights that rela tively depreciated real exchange rates (i.e., weak home currency) favor (a) the JV over the WOS and (b) EXP mode over the WOS or JV Finally, we summar ize our results into useful guidelines for global production managers.