Academic journal article Academy of Accounting and Financial Studies Journal

The Effects of Exchange Rate Volatility on Export Pricing Decisions: Evidence from Taiwan Industries (1993-2003)

Academic journal article Academy of Accounting and Financial Studies Journal

The Effects of Exchange Rate Volatility on Export Pricing Decisions: Evidence from Taiwan Industries (1993-2003)

Article excerpt

ABSTRACT

Export pricing decisions are more complicated than domestic pricing decisions. Exchange rate volatility can have major effects on export pricing decisions. Export pricing decisions and exchange rate risk have dominant and immediate impact on exporters' profitability and competitiveness. Exporters often have to compromise their profit margins in setting export prices in response to exchange rate changes. This study presents a conceptual framework of export pricing decision making from internal/external factors and export pricing methods, and examined the relationship between export pricing of international trade and exchange rate volatility in an empirical study.

INTRODUCTION

Export pricing decisions are more complicated than domestic price decisions. There are many of variables involved in this issue: customer orientation, market competition, negotiation power, supply and demand position, exchange rate volatility, risk attitude, etc., (Katsikeas, Leonidou & Morgan, 2000; Reid, 1983).Even though pricing strategies and exchange rate risk have a dominant and immediate effect on exporters' profitability and competitiveness, the relationship between export pricing and exchange rate volatility for international trade is still a neglected research area.

Exchange rates can have a major effect on export pricing strategies. Currency appreciation (depreciation) can reduce (increase) exporters' competitiveness and profitability by changing margins causing firms to change prices in response to exchange rate changes. The consequence of exporters' reactions to exchange rate changes is the notion of exchange rate pass-through--the extent to which exporters pass along exchange rate-induced margin increases (decreases) by lowering (raising) prices in export market currency terms (Clark, Kotabe & Rajaratnam, 1999).

The objective of this paper is twofold: (1) to present conceptual framework of export pricing decisions making based on internal/external environment and export pricing methods, (2) to examine the relationship between export pricing of international trade and exchange rate volatility using an the empirical study.

LITERATURE REVIEW

Because of market integration, trade barriers cutback, technology innovation and globalization, exporters need to devote more emphasis on pricing decisions (Kublin, 1990). Existing studies, however, on export pricing were unbalanced because researchers emphasized domestic customer reaction to different pricing practices (Aulakh & Kotabe, 1993; Cavusgil, 1990; Cavusgil & Myers, 2000; Johanson & Arunthanes, 1995). Only a few empirical studies focused on export pricing strategy (Cavusgil, 1988; 1996; Nicholas & Bello, 1992; Stottinger, 2001; Tzokas, Hart, Argouslidis & Saren, 2000; Yang, 1996).

Studies on export pricing issues can be broadly divided into three basic dimensions. The first dimension includes internal factors, such as product variables, company variables and management attitudes. The second dimension includes, external factors, such as market related variables and industry related variables (Ahtiala & Orgler, 1995; Akintoye & Skitmore, 1992; Piercy, 1981; Thach & Axinn, 1991). FIGURE 1 presents a classification of these factors and variables.

[FIGURE 1 OMITTED]

The third dimension includes export pricing methods. Six pricing methods are suggested by Cannon and Morgan (1990), target-profit, cost-plus, perceived-value, going-rate, sealed-bid, and negotiated pricing. Cannon and Morgan (1990) presented a pricing strategy structure which conceptualizes pricing outcomes as a function of pricing strategies constrained by environmental factors. The framework was derived from the pricing literatures to explain and enhance pricing decisions making. A summary of six pricing methods is presented in the Table 1.

The extent to which exchange rate changes were reflected in the import/export prices has been termed "exchange rate pass-through". …

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