Global production and sourcing strategies under exchange rate uncertainty

This dissertation consists of three chapters, each addressing a different problem. The first chapter, Exchange Rates and the Choice of Production Mode in Supplying Foreign Markets, studies the effects of macroeconomic and other parameters on the long term production related strategies of firms entering foreign markets. Among the strategies considered are exporting, joint ventures with local partners and wholly owned production facilities in the foreign country. The problem is formulated both as discrete and continuous time stochastic dynamic program. We find conditions under which one production mode dominates the other modes. An insightful result of the model is the identification of a hysteresis phenomenon that characterizes switching behavior between strategies in the presence of switch-over costs. The second chapter is an empirical extension of Chapter 1. In this we use appropriate data from the Bureau of Economic Analysis. We show that the Wholly Owned Subsidiaries mode of operations is preferable to Joint Ventures or to exporting for relatively appreciated home exchange rate. On the other hand, for a depreciated exchange rate, the exports mode is preferable. Also, we find that exchange rate volatility increases the degree of mode switching inertia, while market competition decreases it.;The last chapter is Global Sourcing Strategies under Exchange Rate Uncertainty. In this chapter we present a stylized modeling framework for the so called global sourcing problem: A firm needs to source a product from various sources (vendors), some of whom are located in foreign countries. The firm has to choose vendors and decide on sourced quantity from each vendor. The supplier choice and sourced quantities can be adjusted dynamically at the expense of switchover costs in response to fluctuating exchange rates. We present structural results for optimal sourcing strategies in the case of two and three foreign suppliers. A general approach based on contingent claims analysis is suggested for numerically evaluating multi-supplier sourcing arrangements in volatile exchange rate environments.