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Operational hedging in foreign direct investments under volatile and divergent exchange rates across countries

Published on Jul 1, 2015in Journal of World Business5.79
· DOI :10.1016/j.jwb.2014.08.012
Sangcheol Song10
Estimated H-index: 10
(""St. Joe's"": Saint Joseph's University),
Seung Hyun Lee21
Estimated H-index: 21
(UTD: University of Texas at Dallas),
Mona Makhija10
Estimated H-index: 10
(Max M. Fisher College of Business)
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Abstract
This study examines the environmental conditions under which multinational corporations (MNCs) engage in operational hedging behaviors to actualize their operational flexibility within their international network. We analyzed a Korean MNCs' database and found that MNCs engage in operational hedging through global intra-firm trade to counteract volatile and divergent exchange rates across countries. Additionally, we found that the MNCs' utilization of intra-firm trade and flexible responses to volatile and divergent cross-country exchange rates enhances their performance. Our findings support the real options lens perspective of the value of multinational operational flexibility under external uncertainty in an international business setting.
  • References (59)
  • Citations (3)
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References59
Newest
Published on Nov 1, 2012in Strategic Management Journal5.57
Seung Hyun Lee21
Estimated H-index: 21
(UTD: University of Texas at Dallas),
Sangcheol Song10
Estimated H-index: 10
(""St. Joe's"": Saint Joseph's University)
This study examines whether or not production shifts occur among the foreign subsidiaries of multinational corporations (MNCs) under the influence of differing macroeconomic conditions in their host countries. This study compares intra‐MNC production shifts under the influence of exchange rate changes across different host countries. Our findings indicate that the increase of a subsidiary's production at the time of its host country currency depreciation decreases the production of other subsidi...
Published on Oct 1, 2012in International Business Review3.64
Jan Hendrik Fisch10
Estimated H-index: 10
(University of Augsburg),
Miriam Zschoche5
Estimated H-index: 5
(WHU - Otto Beisheim School of Management)
Abstract Research on international divestment has identified a variety of factors that influence the closure of individual subsidiaries. Drawing on the concept of operational flexibility, this paper investigates the flexibility characteristics of an international production network to predict divestments of elements of this network. The analysis of 596 production locations of 189 German manufacturing firms reveals that the decision to divest a foreign location due to rising and uncertain labor c...
Published on Jun 1, 2011in Journal of International Management2.83
Jan Hendrik Fisch10
Estimated H-index: 10
(University of Augsburg),
Miriam Zschoche5
Estimated H-index: 5
(University of Augsburg)
Previous work shows that multinationality creates firm value due to the potential of multiple host countries to provide operational flexibility. This paper examines whether this value effect on the stock market is backed by a profitability effect of exercising operational flexibility through production shifting across countries. Our panel study of German MNCs confirms that production shifting due to local factor cost changes increases the profitability of international production networks. Howev...
Published on Apr 1, 2010in Journal of International Business Studies7.72
Chris Changwha Chung10
Estimated H-index: 10
(KU: Korea University),
Seung Hyun Lee21
Estimated H-index: 21
(UTD: University of Texas at Dallas)
+ 1 AuthorsTakehiko Isobe10
Estimated H-index: 10
(Keio: Keio University)
This paper compares two real options – within-country growth and across-country operational flexibility – to examine subsidiary expansion/contraction during times of economic crisis. Specifically, we examine how the real options orientations of individual subsidiaries interact with the general characteristics of multinational enterprise networks. Our main findings are that: (a) economic crises can be detrimental for subsidiaries with stronger within-country orientations, and advantageous for tho...
Published on Jan 1, 2010in Strategic Management Journal5.57
Evan Rawley7
Estimated H-index: 7
(UPenn: University of Pennsylvania)
This paper examines the impact of coordination costs and organizational rigidity on the returns to diversification. The central thesis is that coordination costs offset economies of scope, while organizational rigidity increases coordination costs, further constraining economies of scope. The empirical tests of this proposition identify the effects of coordination and organizational rigidity costs on business-unit and firm productivity, using novel data from the Economic Census on taxicab and li...
Published on Jan 1, 2010in Journal of International Business Studies7.72
Ilya Cuypers8
Estimated H-index: 8
(Singapore Management University),
Xavier Martin15
Estimated H-index: 15
(Tilburg University)
This paper examines the boundaries of real options logic, with an application to joint ventures (JVs). We distinguish between forms of uncertainty that are resolved endogenously and those that are resolved exogenously, and theorize that only exogenous uncertainty will have the impact predicted by real options theory on a foreign investor's choice of how large an equity share to take in a JV. We theorize that macroeconomic and institutional variables generate exogenous uncertainty whereas, by con...
Published on Oct 1, 2009in Journal of Operations Management7.78
Dan Weiss9
Estimated H-index: 9
(TAU: Tel Aviv University),
Michael W. Maher13
Estimated H-index: 13
(UC Davis: University of California, Davis)
This paper investigates operational hedging against severe disruptions to normal operations. It offers a new method to evaluate the extent that operations policy serves as a hedge against adverse circumstances. We apply the proposed method to explore how supply chain characteristics affect the responses of airlines to the acute demand fall off after the September 11 terrorist attacks. Results indicate that operational hedging vehicles (fleet standardization, high-fleet utilization, an aircraft o...
Published on Oct 1, 2009in Industrial and Corporate Change1.82
Jonathan P. O'Brien12
Estimated H-index: 12
(UCD: University College Dublin),
Timothy B. Folta23
Estimated H-index: 23
(Purdue University)
In this article, we examine whether the option value of keeping an operation alive will deter firms from exiting an industry. We find that uncertainty dissuades firms from exiting an industry, but only when the sunk costs of entering and exiting that industry are sizeable. Moreover, we argue and find that sunk costs can be influenced by the technological intensity of an industry, by the extent to which a firm competes on the basis of innovation, and by the firm's diversification strategy. Copyri...
Published on May 1, 2009in Strategic Management Journal5.57
Seung Hyun Lee21
Estimated H-index: 21
(UTD: University of Texas at Dallas),
Mona Makhija10
Estimated H-index: 10
(Max M. Fisher College of Business)
This study investigates the value of the strategic flexibility provided by firms’ international investments during an economic crisis, defined here as an unanticipated significant downturn in the economy. To avoid below-par performance, firms need to adapt quickly to this significant change in their environment, making real options very valuable to them. Although firms’ international investments can potentially provide such flexibility, this issue has not been empirically examined in a context o...
Published on May 1, 2009in Journal of International Business Studies7.72
Rene Belderbos30
Estimated H-index: 30
(Katholieke Universiteit Leuven),
Jianglei Zou5
Estimated H-index: 5
(BNP Paribas Fortis)
This paper develops a real options portfolio perspective on foreign affiliate divestments. Affiliates are less likely to be divested in response to adverse environmental change if they represent growth or switch option value to the multinational firm under conditions of macroeconomic uncertainty. However, the affiliate is partially redundant to the option value of the multinational firm's affiliate portfolio if the affiliate shares the manufacturing platform role in the host country with other a...
Cited By3
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Published on Mar 21, 2019in Applied Economics0.97
Nicholas Apergis37
Estimated H-index: 37
(University of Derby),
Mita Bhattacharya10
Estimated H-index: 10
(Monash University),
John Nkwoma Inekwe4
Estimated H-index: 4
(Macquarie University)
AbstractUncertainty is a key contextual factor that affects the decision-making of multinational corporations on many types of international operation. However, the variety of ways in which uncerta...
Published on Jul 1, 2018in Long Range Planning3.36
Jan Hendrik Fisch10
Estimated H-index: 10
(WU: Vienna University of Economics and Business),
Bjoern Schmeisser2
Estimated H-index: 2
(WU: Vienna University of Economics and Business)
Abstract This study shows that upgrading sales operations in host countries towards production allows MNCs to perform global arbitrage in their networks of foreign subsidiaries and thereby contributes to a strategy of reaping the benefits of multinationality. We predict and find that operation upgrades follow opportunities of improving resource flows in the subsidiary network to exploit the advantages of host countries in tax rates, investment incentives, and technological knowledge across borde...
Published on Jun 1, 2016
Hasan Dinçer9
Estimated H-index: 9
,
Ümit Hacıoğlu8
Estimated H-index: 8
+ 1 AuthorsDursun Delen32
Estimated H-index: 32
(Oklahoma State University–Tulsa)
The 2008-2009 global financial crisis and its subsequent ramifications on capital markets have led to an increasing attention on the importance of cognitive and behavioral issues in finance. The purpose of this study is to determine the ranking of the industry alternatives for portfolio investments based on individual investors' perceptions. Accordingly, a hybrid analytic multi-criteria decision model (MCDM)-based on the Fuzzy Analytic Hierarchy Process (FAHP) and the Fuzzy Technique for the Ord...
View next paperMultinational Firm, Foreign Production, and Hedging Behaviour