| dc.description.abstract | This paper establishes a three-country, two-firm model of export competition to discuss
“exchange rate”how to affect the firms whether to engage in foreign direct investment (FDI) or not.
In the model, we assume a domestic firm and a foreign firm which are located in different countries
and whose marginal costs are asymmetrical. In respect of production, there are two decisions which
may be adopted by the domestic firm. The first one is direct export which means each firm will
produce products in their own countries and the second one is foreign direct investment which means
the domestic firm will produce in the foreign country to lower its production cost. After producing
homogeneous products, the two firms simultaneously export their own products to the third-country
market and compete in a Cournot fashion.
The major findings of the paper are as follows: First, if devaluation occurs in domestic country
with incomplete capital control, it will enhance the production cost in the foreign country. This may
cause that domestic firm isn’t interested in engaging in foreign direct investment. On the other hand,
if devaluation occurs in the domestic country with lightly capital control and the difference of
production costs between domestic and foreign firms are much larger, it may cause that domestic
firm is still interested in foreign direct investment. This is due to the increment of export competition
is larger than the increment of production cost. Second, if devaluation occurs in the foreign country
with strict capital control, it may cause that domestic firm isn’t interested in foreign direct investment;
on the contrary, if devaluation occurs in the foreign country with lightly capital control, the effect of
devaluation in the foreign country will depend on the difference of production costs and the ratio of
factors of production between the two firms. Finally, with lightly capital control, if there are a larger
difference of production costs and a higher ratio of foreign-owned factors of production between the
domestic and foreign firms, it will increase the interest of the domestic firm to engage in foreign
direct investment no matter the devaluation occurs in the domestic or foreign country. | en_US |