Academic journal article Management International Review

Inter-Country Exchange Rates and Intra-Firm Trade Flow within Global Network of Multinational Corporations

Academic journal article Management International Review

Inter-Country Exchange Rates and Intra-Firm Trade Flow within Global Network of Multinational Corporations

Article excerpt

Abstract This study examines how effectively multinational corporations (MNCs) respond to changing external environments by intra-firm shifts of products under the influence of divergent currency changes among countries. We test main hypotheses using a panel dataset of Korean FDI and feasible generalized least square model on STATA 10. We find that more counterpart affiliates with opposite directional exchange rate change, lower transportation costs of product shipping, lower labor cost growth rates, and higher portfolio ownership control are positively associated with the subsidiary' intra-firm sales. By examining the actual mechanisms whereby MNCs can realize operational flexibility through intra-firm trade among their foreign subsidiaries, this study extends the multinational operational flexibility literature. We show that the magnitude of intra-firm trades within the MNC's subsidiary network reflects the level of its operational flexibility.

Keywords MNCs * FDI * Exchange rate * Transportation costs * Labor cost * Ownership control

1 Introduction

Since macro-economic uncertainties in countries significantly affect the cost of doing business, one of the most important strategies for multinational corporations (MNCs) must involve effectively managing such uncertainty. Since MNCs cannot anticipate exactly how the future will unfold in a changing environment, it is crucial for them to be able to change established strategies without incurring significant costs (Kogut and Kulatilaka 1994; Lee and Makhija 2009a, b). Such flexibility allows MNCs to achieve higher competitive advantage over their competitors that lack the same level of flexibility (Allen and Pantzalis 1996; Chung et al. 2010; Fisch and Zschoche 2011, 2012; Lee and Song 2012).

The literature on multinational operational flexibility, therefore, focuses on flexible management to cope with surging uncertainty. It argues that, particularly in times of uncertainty, MNCs benefit from the ability to adjust their value-chain activities, which include production and sales among affiliated firms located in different countries (Cohen et al. 1989; Cohen and Lee 1989; Chung et al. 2010; Hodder and Jucker 1985; Huchzermeier and Cohen 1996; Pantzalis et al. 2001). In other words, MNCs with operations in multiple countries are better able to respond to unexpected changes in their investment countries' macro-economic conditions by exploiting cost differentials on a global scale and coordinating their productions within the subsidiary network (Allen and Pantzalis 1996; Cohen et al. 1989; Cohen and Lee 1989; Huchzermeier and Cohen 1996; Tang and Tikoo 1999). These arguments are similar to the real options argument that MNCs can preserve upside potentials and curb downside risks with the help of flexible responses to favorable and unfavorable changes in macro-economic conditions of their investment countries (Kogut and Kulatilaka 1994; Lee and Song 2012; Pantzalis et al. 2001).

However, in spite of increasing interest in this topic, few empirical studies directly test MNCs' operational flexibility. We argue that without directly examining how MNCs transfer resources or relocate their value-chain activities among affiliated firms, it would be difficult to determine whether MNCs actually exercise multinational operational flexibility using their portfolio of subsidiaries. Additionally, few studies examine how MNCs' operational flexibility is realized at the subsidiary level. Thus, we address the following question: How do MNCs' foreign subsidiaries respond flexibly to uncontrollable changes in macro-economic factors in their host countries and take advantage of their parent company's operational flexibility?

To answer this question, we first examine the impact of a host country's currency depreciation on a foreign subsidiary's intra-firm product sales to its affiliates in other countries undergoing a currency appreciation. …

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