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International Firm Investment under Exchange Rate Uncertainty

Review of Finance, Forthcoming

54 Pages Posted: 3 Mar 2008 Last revised: 24 Oct 2015

Alexandre Jeanneret

HEC Montréal

Date Written: October 23, 2015


This paper develops a real options theory to examine the effects of exchange rate uncertainty on foreign direct investment. Firms face a choice between participating in foreign markets through exports or investing abroad to relocate production. The model predicts that the most productive firms invest abroad when exchange rate volatility is low and export otherwise, whereas the least productive firms invest abroad when volatility is high. Aggregation over heterogeneous firms produces a negative and non-linear relation between exchange rate uncertainty and total international investment. An analysis of 84 developed and emerging economies over the 1996-2012 period provides empirical support for the model's predictions.

Keywords: Real Options, Uncertainty, International Investment, Foreign Exchange

JEL Classification: G13, D81, F21, F31

Suggested Citation

Jeanneret, Alexandre, International Firm Investment under Exchange Rate Uncertainty (October 23, 2015). Review of Finance, Forthcoming. Available at SSRN: or

Alexandre Jeanneret (Contact Author)

HEC Montréal ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7


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