Optimal Foreign Investment and Export Strategy with Competition and Variable Cost
Issue Date:
2023-06-30 01:21:39 (UTC+0)
Abstract:
This paper uses real option theory to explicitly derive an optimal foreign investment rule. In the setting we characterize the investment decisions and give rise to a theoretic analysis of optimal foreign direct investment timing under exchange rate uncertainty with industry competition and firm marginal cost. This paper demonstrates the impact on the relevant economic variables and infer empirical implications to results. The model is extended to include an exit option and externalities, which have implications for divesting FDI and policy. This paper analyzes that the ratio of externality to exchange rate affect entry of greenfield investment and exit of selling out. The predictable results suggest that the ratio changes play an important role at switching its production mode that have an impact on the choice for better investment opportunities. This enriches the literature and captures model policy driven FDI as a dynamic process.
