TY  - JOUR
AU  - Goldberg,Linda S.
AU  - Kolstad,Charles D.
TI  - Foreign Direct Investment, Exchange Rate Variability and Demand         Uncertainty
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4815
PY  - 1994
Y2  - August 1994
UR  - http://www.nber.org/papers/w4815
L1  - http://www.nber.org/papers/w4815.pdf
N1  - Author contact info:
Linda S. Goldberg
Research Department, 3rd Floor
Federal Reserve Bank-New York
33 Liberty Street
New York, NY 10045
Tel: 212/720-2836
Fax: 212/720-6831
E-Mail: linda.goldberg@ny.frb.org

Charles D. Kolstad
Department of Economics
University of California
Santa Barbara, CA 93106
Tel: 805/893-2108
Fax: 805/893-8830
E-Mail: kolstad@econ.ucsb.edu
AB  - Variable real exchange rates influence the country choice for location of production facilities by a multinational enterprise.  With risk averse investors and fixed productive factors, a parent company should not be indifferent to the choice of production capacity location, even when the expected costs of production are identical across countries.  If a non-negative correlation exists between real export demand shocks and real exchange rate shocks, the multinational will optimally locate some of its productive capacity abroad.  The share of production capacity optimally located abroad increases as exchange rate volatility rises and as export demand shocks become more correlated.  These theoretical results are confirmed by empirical analysis of quarterly United States bilateral foreign-direct- investment flows with Canada, Japan, and the United Kingdom.
ER  -