The Exchange Rate Exposure of a Global Competitor
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226 JOURNAL OF INTERNATIONALBUSINESS STUDIES, SECOND QUARTER1990
resultdo not embodythe featuresof the world economythat made the probleminterestingandimportantin thefirstplace.Theseare:(1)a macroeconomy in which both the firm and its customersand suppliersare exposedto exchangerateshocks;and (2) the emergenceof globalcompetition amonglargemultinationalfirmswithinproductmarketsof varying sizeandstrategicimportance.Thispaperhighlightstheimportanceof these considerationsby incorporatingthem into a simple model of bimarket duopolistsfacingdemandthat dependsin a generalwayon the exchange rate. The paper shows that such a duopolist'sexposureis not well described by earliermodels. This exposureis the sum of a base case ("orthodox") exposure,identifiedin previousstudies,andtwo othercomponents:terms associatedwithexchangerate-induceddemandshiftsandtermsassociated with firms'reoptimizationfollowingan exchangerateshock. The former arise from the directdependenceof demandon relativecurrencyvalues and areincludedin exposuresidentifiedby Flood and Lessard[1986]and Choi [1986].Thelatteraredueto imperfectcompetitionwithinandacross nationalproductmarkets.These additionalcomponentsof exposurecan easilyhavesignificantmagnitudesandthusoverwhelmthebasecaseexposure.Dependingon theirsigns, they can offset the base case, yieldingan "unorthodox"exposure,or "doubleit up,"givinga muchlargerexposure than existingmodels would suggest. Finally,the paperusesnumericalexamplesto showthat for firmsbasedin "strategic"nationalproductmarkets,the componentsof exposureassociatedwith demandshiftsand reoptimizationmaybe especiallyprominent. This is preciselythe position occupiedby U.S. firms in many industries (e.g., automobiles,pharmaceuticals,semiconductors).Thatsuchfirmsare likely to have exposures with significantly different magnitudes and possibly differentsigns from those commonly anticipatedshould be of somepracticalimportanceto the firmsandto publicsectordecisionmakers such as tradenegotiators,legislatorsand centralbankers. The paper is organized as follows: the second section reviewssome previouswork on operatingexposureto exchangerates. In sectionthree, operatingexposureis formallydefined and a model of the multimarket oligopolist'sexposureis presented.The fourthsectionpresentsnumerical examplesembodyingsome stylized facts about U.S. firms and markets. The final section presentsconclusions. PREVIOUSSTUDIES
Thevalueof expectedfutureoperatingcashflowsdependson relativeprices and will change when relativeprices change. If the change in relative pricesis broughtaboutby an exchangerateshock, the associatedchange in the valueof operatingcashflowsis referredto as ''operatingexposure" to theparticularexchangerate(s).1Theoreticaltreatmentsof operatingexposurehaveappearedin boththe managerialandfinancialeconomicsliterature since the breakdownof the BrettonWoods systemin the early 1970s.
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