EXCHANGE RATES AND FOREIGN DIRECT INVESTMENT IN OLIGOPOLIES

Benan Zeki ORBAY (İstanbul Technical University)
Eren İNCİ (Boston College)

This paper examines the effects of exchange rates on R&D activities and international strategy choices of the oligopolies. We develop a three-stage game-theoretic model in which two firms are located in two different countries. The firms choose the mode of foreign expansion in the first stage. They decide how much to spend on R&D, and how much to sell in domestic and foreign markets, in the second and the third stages, respectively. We assume that the firm located in one of these countries is technologically less advanced than the other firm and thus, has a higher initial marginal cost. On the other hand, it is also assumed that this country's market is smaller than the other.

Earlier studies show that there is a positive relationship between R&D activities and foreign direct investment decision. In other words, multinational firms invest more on R&D. The level of spillover turns out to be an important determinant of R&D investment and the international strategy of the firms. This study explores how depreciation in one country's currency affects the relationship between R&D activity and international strategy choices.