Abstract

Exchange Rate Pass-Through and Pricing-to-Market behavior is an important consideration in International Economics and Industrial Organization Theory. The goal of this paper is to provide both theoretically and empirically justified definition of Foreign Direct Investment (FDI) effect on extent of exchange rate pass-through. In the theoretical part, the Cournot fashion of international duopoly market is constructed to explain reaction functions between a local firm in a host country and a foreign multinational. Preliminary results of theoretical framework indicate that FDI will have an affect on the lowering degree of exchange rate pass-through and generates higher degree of Pricing-to-Market behavior. We estimate the model of exporters with multi-destination by observing samples of five U.S. exporting industries based on 4-digit SIC index. We approach the ideas of spatial econometrics with belief that disturbance terms are possible to spatially correlate across countries, based on geographic proximity measurement. The estimated results show that all types of foreign direct investments have an affect on the lowering degree of pass-through while Joint Venture generates the most significant prediction and Division generates the least. The effect of having the first foreign operation in local markets is not significant to the degree of pass-through.

This work is licensed under a Creative Commons Attribution 4.0 License.