Multinational Investment under Uncertainty

This paper builds a real options model to quantify multinational investment timing decisions under both foreign market demand and exchange rate dynamics, which are largely overlooked in academia yet very common in the real world of international investments. We find that (1) a domestic firm may prefer to undertake FDI under an exchange rate depreciation environment provided high foreign demand and domestically sourced investment costs. (2) Both exchange rate and demand uncertainties could have either positive or negative impacts on international investments, depending on their correlations and the relative dominance between “real option effect” and “revenue effect”. A simple simulation exercise confirms model predictions and shows that generally the impact of demand uncertainty should be more prominent than that of exchange rate uncertainty.