production flexibility as a motive for multinationality this paper examines how uncertainty in future operating costs at the time of undertaking long lived and irreversible capital investment projects may provide an incentive for multinational production this incentive may be present even if firms are risk neutral as long as they face a downward sloping demand curve the lower the international correlation between marginal cost shocks and the lower the elasticity of demand the greater the benefit to establishing plants in different countries however even if cost fluctuations are perfectly correlated internationally there may still be gains from multinational production

operational hedging strategies and competitive exposure to exchange rates this paper investigates the impact of operational flexibility on firms economic exposure to currency fluctuations in the presence of global competition we consider a global firm who sells as a monopolist in the domestic market and also sells to a foreign market facing competition from a local competitor of certain capacity we compare the effects of two operational strategies of the global firm namely matching currency footprints natural hedge and the capacity pooling strategy with allocation flexibility for a two stage stochastic model we derive the optimal capacity and selling decisions for the global firm and from the comparative statics analysis of our model we infer useful managerial insights 1 we find that operational flexibility enables the global firm to exploit the possible high exchange rate i e devalued home currency realizations for profit improvement and thus increases in the long run the firm s expected profit 2 furthermore operational flexibility allows for downside risk control as the exchange rate becomes more volatile since the resource pooling option cleverly exercised minimizes the impact of unfavorable currency realizations 3 the global firm s operational flexibility increases its competitor s downside risk but may also benefit the competitor s expected profit since a flexible global firm may decide not to compete when the exchange rate is not favorable in conclusion our paper substantiates that natural hedge is not effective from a profit maximization perspective we clearly illustrate the robust profit maximizing performance and reasonable downside risk control of operational hedging approaches which rely on the clever exercising of operational flexibility options such as resource pooling and allocation in handling competitive exposure to fluctuating exchange rates

compliance path and impact of ethanol mandates on retail fuel market in the short run past studies have examined the impact of ethanol mandates with a long run perspective and were thus able to assume away short run rigidities and some of the specifics of the biofuel mandates these studies have been of limited use in informing current policy debates because the short to medium run reality is one of strong regulatory and infrastructure rigidities that restrict how ethanol can be consumed in the united states our objectives in this paper are to provide a more coherent framework than currently exists to model and understand how compliance with ethanol mandates in the short run cannot be met with conventional gasoline blends how compliance impacts fuel prices and consumer and producer welfare and also to measure the size of the transfer that occurs between refineries and ethanol producers through the market s renewable identification numbers rins in a model calibrated to 2015 data we find that the effects of increasing ethanol mandates that are physically feasible are close to zero on the retail price of gasoline this result is robust to different gasoline prices supply elasticities and export demand elasticities increased mandates can have a large negative effect on the price of high level ethanol gasoline blends such as e85 if the mandates are increased to approach consumption capacity

welfare impacts of alternative biofuel and energy policies an open economy equilibrium model is derived to investigate the effects of energy policy on the u s economy with emphasis on corn based ethanol a second best policy of a fuel tax and ethanol subsidy is found to approximate fairly closely the welfare gains associated with the first best policy of an optimal carbon tax and tariffs on traded goods the largest economic gains to the u s economy from these energy policies arise from their impact on u s terms of trade particularly in the oil market conditional on the current fuel tax an optimal ethanol mandate is superior to an optimal ethanol subsidy copyright 2011 oxford university press

operational flexibility and market valuation of earnings this paper examines the association between the stock returns and accounting earnings of firms that have different levels of operational flexibility operational flexibility is a firm s ability to respond profitably to environmental fluctuations by shifting factors of production within a multinational network of subsidiaries the geographic breadth and depth of a firm s multinational network are used as indicators of operational flexibility we find a significantly greater coefficient relating stock returns and accounting earnings for multinational firms that operate in many countries but limit their concentration in any one foreign country than for other multinational firms or domestic firms this coefficient is significantly smaller for multinational firms whose foreign subsidiaries are highly concentrated in a few countries when all multinational firms are pooled together we find their earnings returns association does not differ from that of domestic firms copyright 1999 john wiley sons ltd

financing flexibility the case of outsourcing abstract we investigate the relationship between the extent and timing of vertical flexibility and the financial choices of a firm by vertical flexibility we mean partial total and reversible outsourcing of a necessary input a firm simultaneously selects the vertical setting and the financial sources of investment in flexibility in particular debt and venture capital a loan may come from a lender that requires the payment of a fixed coupon over time and an option to buy out the firm in certain circumstances debt leads to the same level of flexibility of an unlevered firm yet investment occurs earlier the injection of venture capital reduces the quest for vertical flexibility and speeds up investment then there arises a fresh substitutability between a financial venture capital and a real variable vertical flexibility

making decisions on offshore outsourcing and backshoring a case study in the bicycle industry abstract small and medium sized enterprises smes are expected to generate new innovations as well as future growth and employment for the european economy in the last two decades a large number of european manufacturing companies have offshored their production operations to low cost countries outside of the eurozone however also bringing back home the once offshore outsourced manufacturing i e backshoring has become a notable phenomenon even if it has received less attention in research until very recently this paper reports research on consecutive offshoring and backshoring decisions of a northern european bicycle manufacturing company we identified an over 30 percent cost advantage from offshore outsourcing that turned over a two year period into an advantage for the firm s own manufacturing in the home country the main reasons for the rediscovered advantage of in house manufacturing were 1 the increasing accuracy of cost allocation procedures 2 changes in external factors such as exchange rate variations and supplier costs 3 growing sales volumes and the simultaneous requirement for shorter lead times resulting from the redefinition of the product and 4 the network level learning to combine factory and network level operations the contribution of this paper is the insight that it provides into how companies can overvalue the cost benefits of offshore outsourcing as well as highlighting factors to be considered and the sensitivity analysis to be carried out in evaluating such decisions

strategic investments trading and pricing under forecast updating this paper considers two independent firms that invest in resources such as capacity or inventory based on imperfect market forecasts as time progresses and new information becomes available the firms update their forecasts and have the option to trade their resources the trade contract is determined as the bargaining equilibrium or alternatively as the price equilibrium assuming a fairly general form of the profit functions we characterize the nash equilibrium investment levels which are first best under the price equilibrium trade contract but not under the bargaining equilibrium trade contract to gain additional insights we then focus on firms that face stochastic demand functions with constant price elasticity and have contingent pricing power assuming a general forecast evolution process we characterize the impact of the option to trade and the firms cooperation on equilibrium investments expected prices profits and consumer surplus finally to study the main driving forces of trading we employ a well established and empirically tested forecast updating model in which the forecast evolution process follows a two dimensional geometric brownian motion under this model we prove that the equilibrium investments expected prices profits and consumer surplus are nondecreasing in the quality and timing of forecast revisions in market variability and in foreign exchange volatility but are nonincreasing in market correlation

internationalization and firm risk an upstream downstream hypothesis corporate international diversification theory posits that multinational corporations mncs should have lower risk and higher financial leverage than purely domestic corporations dcs we suggest an alternative upstream downstream hypothesis according to which the overall effect of internationalization on the risk and leverage of mncs is expected to vary with home and target market conditions the empirical results are consistent with the suggested hypothesis

multinational plant location as a game of timing we study the problem of when firms should switch from exporting to producing at an onshore plant which will cater to a local market the model incorporates factors such as rivalry differences between costs of domestic and offshore production differences in consumer preferences for offshore and domestically produced goods and the capital costs associated with switching to domestic production we find equilibrium timing patterns where there is a leader and a follower diffusion equilibria to be most typical furthermore we find that a firm with lower switching costs has a competitive advantage in the determination of which firm will lead it is found in the duopoly model that market growth and production and transportation unit costs have a relatively greater impact on the timing of the switch than do changes in demand elasticities or changes in the fixed costs of switching with more firms and increased competition however the effect of changes in fixed costs become relatively greater

impact of sourcing flexibility on the outsourcing of services under demand uncertainty abstract this paper investigates the relationship between market conditions and the value and use of sourcing flexibility for service processes we develop and analyze a series of models and we derive expressions for the optimal switching decision the value of the option to outsource the value of the option to backsource and the probability and timing of switches between the alternative sources one contribution is the models and associated derivations which are largely new to the literature and may serve as a tool to support service sourcing plans and decisions the second contribution is a series of results with managerial implications 1 the probability of outsourcing is generally increasing in volatility for high skill process and decreasing in volatility for low skill processes earlier work has found that the hysteresis band is increasing in volatility which is interpreted as an indicator of increasing organizational inertia we also find that the hysteresis band is increasing in volatility but interestingly for the case of high skill processes organizational inertia tends to be decreasing in volatility 2 the option to backsource is generally more valuable for high skill processes than for low skill processes this result suggests that investments to make it easier to backsource should have a higher priority for high skill processes 3 the value of the option to backsource a high skill service process can be decreasing in volatility the result suggests that a rather nuanced consideration of volatility is in order when considering investments in the flexibility to backsource a high skill process

optimal operating policies for multiplant stochastic manufacturing systems in a changing environment this paper addresses the horizontal coordination between production units located in different countries within a supply chain in a changing environment the model incorporates 1 congestion and delay through uncertainties in demand and processing times 2 a changing production cost environment through uncertainty in an environmental state such as the exchange rate and 3 allowing production to stock the main contribution of the paper is to characterize the optimal production policy assuming no switchover cost as a barrier type control policy for a series of models for each plant there is a barrier function defined on the environmental state that gives the total worldwide stock level barrier this plant should be operated if and only if the stock level is below this barrier the authors also show that in a simple setting of two plants in different countries the barrier functions are not always monotone in the exchange rate even when the production costs are the authors present a condition under which the control barriers are shown to be monotone under this condition and with only two plants it is optimal to follow a primary secondary plant policy in which given a fixed environmental state it is optimal to operate both plants when stock is low only the primary plant when stock is moderate and neither when stock is high furthermore the roles of the plants switch as the environmental state passes through the equal production cost state in addition the firm seeks to carry the most stock as a hedge against future environmental state moves when one plant is significantly cheaper than the other the firm seeks to carry the least stock when both plants are equally costly to operate

optimal investment in product flexible manufacturing capacity this paper presents a model and an analysis of the cost flexibility tradeoffs involved in investing in product flexible manufacturing capacity flexible capacity provides a firm with the ability to respond to a wide variety of future demand outcomes but at the expense of the increased cost of acquiring flexible manufacturing capacity as compared with dedicated or nonflexible capacity we formulate the product flexible manufacturing capacity investment decision as a two stage stochastic program in the first stage the firm must make its investment decision in manufacturing capacity before the resolution of uncertainty in product demand in the second stage after demand for products are known the firm implements its production decisions constrained by the first stage investments the main contributions of this paper are threefold first we develop a model of the firm s flexible manufacturing investment decision that conceptually captures some of the key characteristics of this complex decision probl

exchange rates and the choice of ownership structure of production facilities the aim of this research is to study the effects of real exchange rates on the long term ownership strategies of production facilities of firms entering foreign markets among the strategies considered are exporting exp joint ventures with local partners jv and wholly owned production facilities wos in the foreign country our research takes a first step in modeling the influence of exchange rates on the choice and dynamic adjustment of such strategies the insights obtained from our modeling analysis are then translated into testable hypotheses and empirically verified with the use of firm level data from u s multinational corporations both at the firm and a more aggregate level an insightful result of our model is the identification of a hysteresis phenomenon that characterizes switching behavior between strategies in the presence of switchover cost the magnitude of the hysteresis band which is a measure of the inertia associated with keeping the current ownership structure is affected by a multiplicity of factors such as exchange rate volatility and market power of the entering firm analytical and numerical results on the effects of such factors on the hysteresis band are provided the four testable hypotheses generated from our modeling analysis are rigorously tested with the use of a multinomial logit model on data obtained from the harvard multinational enterprise database and a data set maintained by the bureau of economic analysis the u s department of commerce the empirical results strongly support our insights that relatively depreciated real exchange rates i e weak home currency favor a the jv over the wos and b exp mode over the wos or jv finally we summarize our results into useful guidelines for global production managers

dodging bullets the heterogeneous effect of political violence on greenfield fdi the relationship between political violence and greenfield foreign direct investment is contingent on the type of violence characteristics of the investment receiving sector and extent to which the investing firm is geographically diversified this paper presents an analysis with a dynamic fixed effects model for a panel of 90 developing countries from 2003 to 2012 the analysis shows that nationwide political conflict is negatively associated with total and non resource related greenfield foreign direct investment but not with resource related greenfield foreign direct investment the insensitivity to political conflict of multinational firms in the resource sector is associated with the high profitability of natural resource extraction and the companies geographic constraints on location choice during the period of estimation in the non resource sector the less geographically diversified firms are most sensitive to the risk of conflict

optimizing an international network of partially owned plants under conditions of trade liberalization for the last four decades the preferred economic philosophy in much of latin america was that of import substituting industrialization as a result multinational corporations mncs approached different countries with the expectation that each plant would primarily serve its domestic market each of these plants was partially owned by the mnc beginning in the late 1980s latin america countries began decreasing barriers to cross border trade this made competition between the units belonging to a common network possible for the first time operations which had subsisted side by side in spite of differences in costs and quality of output and which were under the control of different owners now found themselves in competition with one another and having to rationalize their efforts in this paper we analyze the problem of operating a network of plants under conditions of free trade and exchange rate fluctuations when the firms that compose it are partially owned subsidiaries of an mnc a model of three subsidiaries and four countries is developed for one industry based on actual corporate and economic data we study the problem of coordinating the activities of the subsidiaries and allocating the gains arising from coordination

asymmetric corporate exposures to foreign exchange rate changes research examining firms economic exposures to exchange rate movements has not differentiated periods of foreign currency appreciation and depreciation when estimating exposure coefficients recent theoretical developments regarding real options and pricing to market suggest corporate exposures may be asymmetric i e the financial performance impact of a foreign currency appreciation may not be offset by the currency s depreciation our empirical analysis indicates that for the small percentage of u s manufacturing firms exposed to currency appreciations or depreciations their exposures are asymmetric 1998 john wiley sons ltd

on integrating theories of international economics in the strategic planning of global supply chains and facility location abstract this paper relates three theories of international economics comparative advantage competitive advantage and competitiveness and formulates the thesis that incorporating them in the form of readily available individual competitiveness indicators in or ms models offers promise to enhance decision support for the strategic planning of global supply chains in general and for locating facilities in particular the purpose of this paper is to relate these theories from the field of international economics to give a roadmap of related measures that are provided by annual competitiveness reports and to pose several research questions as challenges to the or ms community as it seeks to improve models to support the strategic planning process accordingly specific objectives of this paper are to relate each of these theories and to describe their interrelationships to describe measures provided by two well known annual competitiveness reports and to illustrate application of the theories as a means of supporting the thesis of the paper and justifying the research questions we pose for future research while this paper discusses topics relative to the broader background of global supply chain design it illustrates applications associated with facility location a component of the global supply chain design since it has a rich history within the or ms community and since it is central to strategic planning in the global economy

the corporate social performance financial performance link strategic managers are consistently faced with the decision of how to allocate scarce corporate resources in an environment that is placing more and more pressures on them recent scholarship in strategic management suggests that many of these pressures come directly from sources associated with social issues in management rather than traditional arenas of strategic management using a greatly improved source of data on corporate social performance this paper reports the results of a rigorous study of the empirical linkages between financial and social performance corporate social performance csp is found to be positively associated with prior financial performance supporting the theory that slack resource availability and csp are positively related csp is also found to be positively associated with future financial performance supporting the theory that good management and csp are positively related 1997 by john wiley sons ltd

an integrated location production distribution and investment model for a multinational corporation abstract we present a mixed integer linear formulation that extends published models on multinational corporation facility location decisions by including exogenous variables such as exchange rates and tariff rates and incorporating production distribution and investment decisions the model provides insights on production levels facility configurations distribution strategies and levels of investment needed at these facilities and explores factors that influence the facility s configuration decisions several scenarios are considered based on various facility configurations and levels of exchange and tariff rates the results obtained from these show that the model s performance and results are in complete agreement with accepted economic theories

an integrated production distribution model for a multi national company operating under varying exchange rates research modeling the production planning and logistics decisions for multi national companies mnc s operating under varying inflation and exchange rates is scanty decisions regarding the products to be made in different facilities and the markets which these facilities would serve are critical to the mnc s success also decisions regarding when to open retain and close facilities are equally important these decisions are sensitive to both inflation and exchange rates accordingly we incorporate these parameters in the development of an integrated production planning and distribution model for an mnc we elicit the performance of the model through examples our results indicate profit reduces by as much as 45 77 depending on the exchange rates initial capacities and restrictions imposed on the more profitable facility

global production planning under exchange rate uncertainty motivated by an aggregate production planning problem in an actual global manufacturing network we examine the impact of exchange rate uncertainty on the choice of optimal production policies when the allocation decision can be deferred until the realization of exchange rates this leads to the formulation of the problem as a two stage recourse program whose optimal policy structure features two forms of flexibility denoted as operational hedging 1 production hedging where the firm deliberately produces less than the total demand and 2 allocation hedging where due to unfavorable exchange rates some markets are not served despite having unused production our characterization of the optimal policy structure leads to an economic valuation of production and allocation hedging we show that the prevalence of production hedging is moderated by the degree of correlation between exchange rates a comprehensive examination under the following four generalized settings provides the depth scope and relevancy that our proposed operational hedges play to facilitate aggregate planning 1 multiple periods 2 demand uncertainty 3 price setting or monopolistic pricing and 4 price setting under demand uncertainty we show that production and allocation hedging are robust for these generalizations and should be integrated into the overall aggregate planning strategy of a global manufacturing firm

erratum to a bi directional examination of the relationship between corporate social responsibility ratings and company financial performance in the european context research focusing on the relationship between measures of corporate social responsibility csr and company financial performance has led to mixed results in the north american context in addition the ethical attitudes and approaches toward csr investments of both companies and rating agencies are not necessarily the same in europe and the united states in this study we use csr ratings issued by a major european csr ratings agency vigeo to examine in a bi directional manner the relationships between csr ratings and financial performance in the european context by bi directional we mean an examination of the relationship between prior csr ratings and subsequent accounting and financial performance and reciprocally the impact of accounting and financial performance of year n 1 on csr ratings of year n our principal findings are 1 the greater the market capitalization of a company the higher the vigeo rating 2 the higher the risk of the company the lower the vigeo rating and 3 the greater the stock market return of a company the lower the vigeo rating based on these findings we propose 1 a concept of political visibility pursuant to which enterprises of a greater size are exposed to greater pressure to conform to norms of socially acceptable behavior 2 a concept of priorities in which enterprises that have resolved their most urgent financial needs have a greater ability to invest in csr 3 a concept of rating downgrading which reveals the sanctioning role of the rating agency from an ethical standpoint

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

real options theory in international business the last quarter century has witnessed substantial growth in applications of real options theory rot to international business ib research in this review we explicate the core rot concepts in the ib context and discuss the contributions of rot based research to three core ib issues timing and scale of market entry or exit entry mode and governance form and the role of multinational networks based on our review we propose a holistic rot view of the multinational enterprise that synthesizes the insights of existing studies finally to move the field forward we highlight key questions and challenges in current rot based work provide a more precise definition of exogenous and endogenous uncertainty suggest empirical designs to test unique rot predictions and explore areas where rot can be combined with other theoretical perspectives to better understand ib phenomena

the newsvendor problem in a global market optimal centralized and decentralized control policies for a two market stochastic inventory system the global markets of today offer to the style goods producer more selling opportunities and pose new challenges in production planning and coordination from a production management standpoint the opportunity to exploit the difference in timing of the selling season of geographically dispersed markets for style goods is important for improving the firm s profitability in this paper we examine the above issue with an insightful model of a producer of style goods selling the goods to two markets a primary and a secondary market with nonoverlapping selling seasons we refer to this problem as the global newsvendor problem for the above two market stochastic inventory systems we first develop optimal centralized control policies then we demonstrate the suboptimality of decentralized production control policies with the production centers at each market treated as independent profit centers and a constant transfer price being used to coordinate their production we propose as an effective alternative a decentralized production control structure with a nonlinear pricing scheme for production coordination among centers administered through an intermediate organizational unit in our modeling we explicitly consider the effects of exchange rate uncertainty on the production planning decisions

an evolutionary approach to understanding international business activity the co evolution of mnes and the institutional environment this paper examines the co evolution of mne activities and institutions external and internal to the firm we develop a theoretical framework for this analysis that draws on the more recent writings of douglass north on institutions as a response to complex forms of uncertainty associated with the rise in global economic interconnectedness and of richard nelson on the co evolution of technology and institutions we link historical changes in the character of mne activities to changes in the institutional environment and highlight the scope for firm level creativity and institutional entrepreneurship that may lead to co evolution with the environment we argue that the main drivers for institutional entrepreneurship are now found in the increasing autonomy of mne subsidiaries thus mne agency derives from more decentralized forms of experimentation in international corporate networks which competence creating nodes of new initiatives can co evolve with local institutions unlike most other streams of related literature our approach connects patterns of institutional change in wider business systems with more micro processes of variety generation and experimentation within and across individual firms this form of co evolutionary analysis is increasingly important to understanding the interrelationships between mne activities and public policy

a stochastic model for risk management in global supply chain networks abstract with the increasing emphasis on supply chain vulnerabilities effective mathematical tools for analyzing and understanding appropriate supply chain risk management are now attracting much attention this paper presents a stochastic model of the multi stage global supply chain network problem incorporating a set of related risks namely supply demand exchange and disruption we provide a new solution methodology using the moreau yosida regularization and design an algorithm for treating the multi stage global supply chain network problem with profit maximization and risk minimization objectives

behavior of the firm under regulatory constraint a recent article by akira takayama discusses an earlier paper by harvey averch and leland l johnson on fair rate of return regulation of public utilities although takayama p 255 agrees with averch and johnson s general conclusions that a firm will tend to increase its investment with the introduction of an active constraint on its rate of return he criticizes the a j argument as being confusing ambiguous and in error takayama then attempts a clarification and presents a new formulation which leads to the a j result quoted above this comment will discuss several of takayama s criticisms in addition to showing that the so called a j effect cannot be derived from the basic assumptions made by both averch and johnson and takayama 1 we will show that the very assumptions used to prove the a j effect by defining the region of x require an assumption that the a j effect exists in the first place

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

potential environmental impacts of increased reliance on corn based bioenergy this paper integrates economic and physical models to assess a how increases in agricultural commodity prices driven by ethanol production and other factors affect land use and cropping systems in the us midwest and b how the changes in land use and cropping systems in turn affect environmental quality in the region the empirical framework includes a set of econometric models that predict land conversion crop choices and crop rotations at the parcel level based on commodity prices land quality climate conditions and other physical characteristics at the sites the predictions are then combined with site specific environmental production functions to determine the effect of rising commodity prices on nitrate runoff and leaching soil water and wind erosion and carbon sequestration results suggest that increasing commodity prices will result in widespread conversions of non cropland to cropland fifty percent of the region s pasture and range land will be converted to cropland with 6 corn rising commodity prices will also result in dramatic changes in crop mix and rotation systems in the midwest with 6 corn the total acreage of corn will increase by 23 and 40 in the corn belt and lake states respectively the acreage of continuous corn will increase considerably in both regions as well these changes in land use and crop mix will have a large impact on agricultural pollution approaches to mitigating the environmental impacts are discussed

the demand for ethanol as a gasoline substitute abstract this paper estimates household preferences for ethanol e85 as a gasoline e10 substitute i develop a theoretical model linking the shape of the ethanol demand curve to the underlying distribution among households of willingness to pay for ethanol i estimate the model using instrumental variables techniques and data from many retail fueling stations i find that a 0 10 per gallon increase in ethanol s price relative to gasoline leads to a 12 16 decrease in the quantity of ethanol demanded my findings imply that preferences for ethanol are heterogeneous and that a substantial fraction of households are willing to pay a premium for the fuel this reduces substantially the simulated efficiency cost of an ethanol content standard since some households choose ethanol without large subsidies mitigating deadweight losses

cost allocation and opportunity costs one explanation for the widespread use of allocated fixed costs is that they can serve as a proxy for difficult to calculate opportunity costs this explanation is pursued by modeling a service department as an m m s s queueing system two main results are that the expected value of opportunity costs equals both the incremental productivity of capacity and the optimal transfer price when the cost of capacity is of the form cs as and is close to one we show that allocated fixed costs are a good proxy for average opportunity costs however if there are great economies of scale is close to zero then a method which charges users only for the variable costs of the service department is recommended finally the economic efficiency of transfer prices based on either variable cost or full cost is compared with optimal transfer pricing policies

profit maximizing cost allocation for firms using cost based pricing this work develops a profit maximizing cost allocation scheme for firms that allocate all costs to their various outputs and then use these costs to set prices a process known as fully distributed cost based pricing if the costs incurred by the firm are not easily traced to a particular output for example the electric bill for a shared manufacturing plant the costs must be allocated the demand for a given output is assumed to be a function of the price hence the cost allocation scheme that is selected will affect both the price and the demand for the output the allocation of common costs that maximizes the firm s overall profit under these conditions is identified frequently the profit maximizing allocation allocates none of the untraceable common costs to one or more of the outputs this allocation scheme stands in contrast to common practices of sharing costs equally or proportionally across outputs examples explore the implications of such a profit maximizing cost allocation on prices and demand in four scenarios i no constraints ii constraints on maximum allowable prices iii a change in market size and iv cost containment incentives

the obsolescing bargaining model mnc host developing country relations revisited the traditional bargaining model of mnc host developing country relations has become obsolete today those relations are better understood as the result of a two tier multi party bargaining process tier 1 bargaining between the governments of host and home countries occurs bilaterally or through multilateral institutions it produces macro rules on fdi that affect micro negotiations in tier 2 per the traditional bargaining model the extent of fdi liberalization resulting from tier 1 bargaining varies predictably across home host country pairs and industries suggestions for testing the two tier bargaining model are also presented

impacts of business environment changes on global manufacturing in the chinese greater pearl river delta a supply chain perspective business operating conditions have changed substantially in the chinese greater pearl river delta gprd due to the chinese currency appreciation rising labour costs highly volatile oil prices and new processing trade policies such changes have triggered manufacturers to rethink their global operations this article studies potential global manufacturing trends from a supply chain perspective a mixed integer programming model suggests that these changes have negatively affected the region s competitive advantages as its labour intensive production mainly targets at the mass market and competes on low costs three production relocation trends are affirmed i e the relocation to lower cost areas within china lower cost asian countries and areas near end markets however it is also discovered that the gprd region still attracts businesses with its formation of industrial clusters the enhanced comparative advantage against competing regions in inland china or asian lower cost countries under high oil

valuing operational flexibility under exchange rate risk in this paper we develop a stochastic dynamic programming formulation for the valuation of global manufacturing strategy options with switching costs overall we adopt a hierarchical approach first exchange rates are modeled as stochastic diffusion processes that exhibit intercountry correlation second the firm s global manufacturing strategy determines options for alternative product designs as well as supply chain network designs product options introduce international supply flexibility supply chain network options determine the firm s manufacturing flexibility through production capacity and supply chain network linkages third switching costs determine the cost of operational hedging i e the costs associated with reducing downside risks overall the firm maximizes its expected discounted global after tax value through the exercise of product and supply chain network options and or through exploitation of operational flexibility contingent on exchange rate realizations in this environment the firm must trade off fixed operating costs switching costs and the economic benefits derived from exploiting differentials in factor costs and corporate tax rates a multinomial approximation of correlated exchange rate processes is proposed that leads to a consistent and tractable lattice model for this compound option valuation problem we then demonstrate how the global manufacturing strategy planning model framework can be utilized to analyze financial and operational hedging strategies

corporate social responsibility and corporate performance evidence from a panel of us listed companies we investigate whether inclusion and permanence in the domini social index dsi affects corporate performance on a sample of around 1000 firms in a 13 year interval by controlling for size industry business cycle and time invariant firm idiosyncratic characteristics our results find partial support to the hypothesis that corporate social responsibility is a move from the shareholders wealth to a multi stakeholders welfare target on the one side permanence into the domini index di is shown to increase reduce significantly total sales per employee returns on equity but not when large and r d investing firms are excluded from the sample on the other side lower returns on equity for domini firms seem nonetheless to be accompanied by relatively lower conditional volatility and lower reaction to extreme shocks with respect to the control sample an explanation for these findings suggested by the inspection of domini criteria is that social responsibility implies on the one side decisions leadi

diversification incentives under price based and cost based regulation this article considers two schemes of regulationforfirms that serve both monopoly markets and markets subjected to substantial competition the first form cost based regulation combines elements of rate of return regulation on monopoly markets with filly distributed cost pricing much like the form of regulation currently in place in the domestic telephone industry the secondform price based regulation would establish rate caps on noncompetitive services and allow the firm to enter into competitive markets and charge whatever prices it might like in those markets models of both forms of regulation are developed and analyzed with respect to incentives for cost misreporting choice of technology cost reducing innovation choices of prices and output levels and diversification into competitive markets

global plant capacity and product allocation with pricing decisions trade offs in global manufacturing decisions involve markets resource costs trade barriers currency exchange rates joint ventures and investments we develop a model that optimizes plant investment decisions while ensuring that the plant investment overhead is optimally absorbed by products produced from that plant the model also simultaneously determines prices by products and countries the special structure of the model is exploited to construct a fast solution procedure the model is used to study the implications of labor cost transportation cost demand and import tariff on production quantities investment and overhead absorption pattern implications of changes in other global parameters such as local content rule local taxes size of the market in a country and long term exchange rates are also studied

cost allocation revisited an optimality result the resource manager of a firm is faced with capacity and pricing decisions with regard to a congestion prone system such as computer communication facilities difficulties arise since the manager is uninformed of the system demand when the capacity decision is to be made a game theoretic model is developed to analyze the effects of different accounting rules on the elicitation of relevant information and ex post efficiency in acquisition and allocation decisions the key result is that the cost allocation method aided by an anonymous reporting scheme is indeed as asserted by zimmerman zimmerman j 1979 the costs and benefits of cost allocations accounting rev 54 july 504 521 a full information efficient rule achieving optimality both in acquisition and allocation decisions discussions of the main assumptions underlying this result are provided

the demand for residential electricity new evidence on time varying elasticities this study employs a generalized functional form to examine demand for residential electiricity the appropriatenes of the conventional double log and linear forms are tested time varying elasicities are estimated major findings are summarized as follows 1 the double log and linear forms can be rejected at the 0 05 and 0 01 levels respectively 2 long run own price elasticities declined in absolute value consistently from 2 13 to 1 19 during the period 1950 87 3 long run income elasticities also decreased from 1 29 to 0 97 during the same period and 4 long run corss price elasticities with respect to the price of natural gas dropped form 0 40 to 0 29 these results may be heplful to decision makers in determining the change in total revenues owning to the change in prices pricing strategies the effectiveness of energy conservation programmes the effect of rising real income on the demand for residential electricity and future demand

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

outsourcing and capacity planning in an uncertain global environment firms employing offshore outsourcing strategies may face both exchange rate and demand uncertainties in this paper we show that the firms may benefit from operational option to switch production by keeping capacities with both domestic and foreign suppliers the value of the operational option increases as the exchange rate uncertainty or demand uncertainty increases in addition when the firms become risk averse they may use domestic capacity to hedge against offshore capacity as a result the firms may choose to hold local capacity even if it exhibits negative marginal contribution to the profit furthermore risk averse firms may keep more total capacity than risk neutral firms

the impact of order and mode of market entry on profitability and market share market share performance and profitability of overseas business activities has long been an important issue in international business in this study we explore the impact of order and mode of market entry into an overseas market we find that early entrants have significantly higher market shares and profitability than late followers we also find that equity joint ventures have a higher profitability than either wholly owned operations or contractual joint ventures a significant interaction exists between order and mode of market entry as expected firm efficiency and size affect the performance of firms these results are based on the business activities of a sample of 14 466 foreign firms in china in 1995

the price and welfare effects of biofuel mandates and subsidies the coordination of agricultural environmental and energy policies requires a thorough understanding of the interactions between crop food and energy markets this paper develops a general equilibrium model to analyze the interactions and to evaluate the price and welfare effect of biofuel mandates and subsidies results suggest that biofuel mandates are a primary cause of some of the major concerns associated with crop based biofuel production including higher food prices and lower consumer welfare the price and welfare effects of biofuel subsidies depend on the level of the biofuel mandate when the mandate is weak or not binding a biofuel subsidy becomes a transfer from consumers to biofuel producers which tends to reduce food and fuel prices because of the negative income effect however with a strong mandate a biofuel subsidy will increase the prices of crops food and fuel when crops account for a large share of production cost and when the supply of crops is inelastic using parameter values consistent with empirical evidence found in the u s we calculated the price and welfare effects of the biofuel mandates and subsidies specified in the energy independence and security act of 2007 results suggest that the biofuel mandates and subsidies increased the price of corn by 25 40 increased the price of food by 1 5 2 5 and lowered the price of gasoline by 5 10 overall the biofuel policies had only a small effect on consumer utility

a general unconstrained model for transfer pricing in multinational supply chains multinational supply chains operate in more than one country or tax jurisdiction and face decision problems concerned with trade flows of resources products and services transfer prices and allocation of transport costs between their divisions these decisions must consider for the sake of optimality corporate and governmental parameters such as the payment of dividends and royalties ownership of and control over subsidiaries income taxes differentials duties and quotas etc in this paper we generalize and extend the theory of the multinational firm to the case of multinational supply chains we propose a model that is more general and comprehensive than the previous ones proposed in the literature to be more specific our model integrates many of the previous research factors and includes new ones such as transport costs and duty drawbacks which are critical for supply chains that operate under international trade regulations under the maximization of the repatriated earnings objective we study the optimality conditions of the corporate decision variables to derive managerial guidelines and to determine how decisions regarding trade quantities transfer prices and transport cost allocations affect the amount of taxes to be paid to host governments as well as the total after tax repatriated earnings of the corporation

technical note financial market approaches to facility location under uncertainty this paper examines financial market approaches for facility location models incorporating uncertainty and risk aversion as an example it compares a model based on the capital asset pricing model with one using a mean variance objective function there are dramatically different computational implications the financial market approach yields simpler procedures and is able to handle more complex problems however as discussed in the concluding observations there are situations where the financial market perspective is less appropriate consequently the mean variance model still has a role in analyzing facility location decisions

the integration of subsidiary political activities in multinational corporations just as the competitive activities of mnc subsidiaries exhibit differentiation as well as integration so might mnc political activities this paper combines the literatures on international business government interactions and on multinational corporations with resource dependence theory as a foundation we develop and test hypotheses on factors that might influence the degree to which subsidiary political activities are integrated with affiliated organizations we find that subsidiary strategic integration and the economic integration of the host country significantly influence integration of subsidiary political activities

a foreign expansion model with multi site locations in service industries abstract capital budget constrained foreign expansion model with multi site locations may have far reaching implications for the service sectors this paper aims to present a foreign expansion model with multi site locations which is capable of optimizing the commodity pricing and capital investment policy having found some properties of the model we propose a solution method which consists of the newton raphson method and the technique of piecewise linear approximation the results of proposed model may be beneficial for foreign expansion in services with regard to businesses like fast food steak restaurant cafe shops and so on

marginal reductions in vehicle emissions under a dual blend ethanol mandate evidence from a natural experiment among the many reasons policy makers across the world have sought to supplement fuel supplies with ethanol blended fuels are the cited environmental benefits that come with replacing a fossil fuel with a cleaner burning alternative dual blend ethanol mandates in which multiple ethanol blends are simultaneously available are one way policy markers can move forward with more aggressive mandates more quickly the recent ethanol mandate in the state of new south wales australia offers a unique natural experiment to quantify the potential environmental benefits and costs of a dual blend ethanol policy this paper estimates the impact on carbon dioxide co2 emissions from road activity that are attributable to the implementation of the new south wales ethanol requirements we find that there was a decrease in emissions due to the policy but that the decrease is relatively minor given the size of the market and that it comes at a high cost the cost was over 1200 per ton of carbon to reduce gasoline emissions by just 1 2

the international control conundrum the case of hyperinflationary subsidiaries standard methods for financial controls of multinational corporations mncs foreign subsidiaries generally provide inadequate managerial support under conditions of extreme environmental turbulence resulting in a highly distortive performance evaluation system this article examines the specific conditions of monetary hyperinflation and how existing control systems should be upgraded or environmentalized in order to cope with such operating conditions a taxonomy of hyperinflationary environments and a control model based upon variance analysis aimed at smoothing excessive swings in the performance of foreign operations is developed thereby correcting for some of the dysfunctionalities in the traditional planning and control processes

a disaggregated nonhomothetic modeling of responsiveness to residential time of use electricity rates in addition to quantifying the load impacts of time differentiated rates on aggregate peak off peak groupings a very finely disaggregated rotterdam demand system is described and estimated for explaining changes in detailed features of customers electricity load patterns this linear first difference formulation allows for nonhomotheticity permits an examination of load impacts on critical hours of the week and makes use of both control and time of use data moreover the proposed specification is parameter parsimonious an illustrative use of this model is portrayed through recent empirical evidence from a residential experiment of a northern winter peaking utility in ontario canada copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the role of inventory in delivery time competition the paper operationalizes the notion of shortage cost by considering the behavior of customers and competing firms and examines the role of inventory in response time competition we start with a single firm production control model in which customers are characterized by their preferences of price quality and delivery time the optimal production inventory policy and the optimal choice between make to order and make to stock operations are determined in simple newsboy like formulas the basic model is then extended to an n firm market game in which firms compete for orders from the aspect of early delivery one could think of this setting as an oligopoly racing market the analysis shows that competition can breed a demand for produce to stock just as other economic phenomena such as economies of scale uncertainty or seasonality can induce make to stock and that delivery time competition increases the buyer s welfare while decreasing the producer s welfare

an evaluation of the investment environment in international logistics zones a taiwanese manufacturer s perspective abstract with the rapid development of international logistics the role of international logistics zones has become increasingly important this study evaluated the importance of investment environment factors namely political infrastructure cost and market factors for firms intention to invest in international logistics zones a structural equation modeling sem approach was employed to analyze respondents foreign direct investment fdi intention results indicated that market cost and infrastructure factors have a positive effect on firms intention to invest in international logistics zones the influence of political factor on firms investment intention was not supported in this study theoretical and practical implications of the findings for firms foreign direct investment in international logistics zones are discussed

the welfare economics of a biofuel tax credit and the interaction effects with price contingent farm subsidies a framework is developed to analyze the effects of a biofuel consumer tax exemption and the interaction effects with a price contingent farm subsidy ethanol prices rise above the gasoline price by the amount of the tax credit corn farmers gain directly while gasoline consumers only gain from any reduction in world oil prices due to the extra ethanol production domestic oil producers lose historically the intercept of the ethanol supply curve is above the gasoline price hence part of the tax credit is redundant and represents rectangular deadweight costs that dwarf triangular deadweight cost measures of traditional farm subsidies copyright 2007 oxford university press

real options in multinational corporations organizational challenges and risk implications in this study we investigate how multinationality affects firms risk levels our investigation builds on the idea from real options theory that international operations offer switching options to multinational corporations yet we also emphasize different sources of coordination costs that can mitigate the benefits of operational flexibility the findings from tobit models accounting for self selection underscore the importance of unobserved heterogeneity in the relationships between international investments and risk levels consistent with the coordination costs surrounding international operations we find that the relationship between multinationality and downside risk is curvilinear risk first declines and then increases as a firm s portfolio of international investments becomes extensive in addition downside risk is an increasing function of the average cultural distance between a firm s home base and the host countries in which its foreign subsidiaries operate

linear and nonlinear exchange rate exposure abstract this paper presents a new methodological approach to examine exchange rate exposure which takes account of the role of the market portfolio and macroeconomic variables in exposure regressions exchange rate regimes based on periods of depreciation and appreciation and nonlinear exposure within each regime we show that the stock market s own exposure to exchange rates should be taken into account before considering industry exposure in addition we adjust the exchange rate and the stock market for common economy wide factors that are unrelated to exchange rates within this framework we show that exposure to bilateral exchange rates is statistically and economically important and that industries with extensive international trade are more often exposed than industries with low levels of international trade the signs of exposure coefficients in each regime are consistent with the extent to which an industry exports we also show that nonlinear exposure is often statistically and economically significant interestingly there is little evidence that industries are exposed to a currency basket

identifying supply and demand elasticities of agricultural commodities implications for the us ethanol mandate we present a new framework to identify supply elasticities of storable commodities where past shocks are used as exogenous price shifters in the agricultural context past yield shocks change inventory levels and futures prices of agricultural commodities we use our estimated elasticities to evaluate the impact of the 2009 renewable fuel standard on commodity prices quantities and food consumers surplus for the four basic staples corn rice soybeans and wheat prices increase 20 per cent if one third of commodities used to produce ethanol are recycled as feedstock with a positively skewed 95 percent confidence interval that ranges from 14 to 35 per cent jel q11 q16 q42 q48

the effects of information voids on capital flows in emerging markets information voids reflect a lack of publicly available information about a country s investment climate and represent the information problems associated with institutional voids we argue that foreign investors differ in their sensitivity to information voids based on their own private information and their flexibility in responding rapidly to change we predict that foreign banks will be least hampered by information voids due to their privileged access to private information about local conditions and ability to adapt quickly to new information portfolio investors while impeded by information voids due to their severely limited access to local private information are able to quickly respond to new information foreign direct investors have moderate access to local private information yet their inability to adapt quickly creates problems dealing with information voids using time series cross sectional data on local public information and capital flows to the thirty largest emerging markets from 1994 to 2012 we find preliminary support for our hypotheses regarding the sensitivity of different investors to information voids we find that direct investors are most sensitive to information voids and banks are least sensitive while portfolio investors are moderately sensitive

exchange rates and prices the adjustment of relative prices to exchange rate movements is explained in an industrial organization approach given labor costs in the respective currencies exchange rate movements change costs for firms selling in the home market and thus disturb the industry equilibrium the extent of absolute and relative price adjustment is shown to depend on market integration product substitutability the relative number of domestic and foreign firms and the market structure the impact of exchange rates on prices is illustrated in a variety of approaches including the cournot a dixit and j stiglitz 1977 and s salop 1979 models some empirical evidence is offered in support of the theory copyright 1987 by american economic association

modeling manufacturing and marketing options in international operations abstract in this paper we model and compare eight manufacturing marketing options that a firm with operations in two countries termed as an international enterprise may adopt manufacturing factors incorporated in the model include factory location inventory economies of scale product design and postponement marketing factors include product positioning and pricing the model also includes international factors such as the exchange rate and transportation cost the first two options are termed core product options where the international enterprise manufactures a core product in a single facility located in one of the countries under the first core product option this facility also performs additional operations on the core product to develop custom tailored products under the second core product option customization of the core product takes place in facilities located in both countries the other six options are characterized by standardization customization of product and pricing policies as well as centralization decentralization of the production function the main result of the analysis is that under certain production related conditions the core product options dominate the other six manufacturing marketing options this result has significant managerial implications since it suggests that the core product options exploit the best of both worlds customized pricing and product policies as well as savings derived from economies of scale from the centralized production of the core product

common stochastic trends in a system of exchange rates univariate tests reveal strong evidence for the presence of a unit root in the univariate time series representation for seven daily spot and forward exchange rate series furthermore all seven spot and forward rates appear to be cointegrated that is the forward premiums are stationary and one common unit root or stochastic trend is detectable in the multivariate time series models for the seven spot and forward rates respectively this is consistent with the hypothesis that the seven exchange rates possess one longrun relationship and that the disequilibrium error around that relationship partly accounts for subsequent movements in the exchange rates a general consensus has emerged in recent years that many macroeconomic time series such as gnp consumption expenditures disposable income etc can be characterized by a stochastic trend model in particular nelson and plosser 22 described this property as one of being difference stationary so that the first difference of a time series is stationary an alternative trend stationary model where a stationary component is added to a deterministic trend term has generally been found to be less appropriate 1 similarly it has long been recognized that many financial time series such as foreign exchange rates are nonstationary e g in meese and singleton 21 the issue of nonstationary is not merely a statistical curiosity but has several important implications for the modeling of exchange rates for instance many models of exchange rate determination under rational expectations require stationarity assumptions when solving out the expected future values of the fundamentals further there has been some controversy over the appropriate transformations to use when conducting tests of whether the forward rate is an unbiased and efficient predictor of the future spot exchange rate 2 some authors e g frenkel 11 12 have conducted tests in levels while geweke and feige 14

operating flexibility global manufacturing and the option value of a multinational network the multinational corporation is a network of activities located in different countries the value of this network derives from the opportunity to benefit from uncertainty through the coordination of subsidiaries which are geographically dispersed we model this coordination as the operating flexibility to shift production between two manufacturing plants located in different countries a stochastic dynamic programming model treats explicitly this flexibility as equivalent to owning an option the value of which is dependent upon the real exchange rate the model is extended to analyze hysteresis effects and within country growth options we show that the management of across border coordination has led to changes in the heuristic rules used for performance evaluation and transfer pricing

on the integration of production and financial hedging decisions in global markets we study the integrated operational and financial hedging decisions faced by a global firm who sells to both home and foreign markets production occurs either at a single facility located in one of the markets or at two facilities one in each market the company has to invest in capacity before the selling season starts when the demand in both markets and the currency exchange rate are uncertain the currency exchange rate risk can be hedged by delaying allocation of the capacity to specific markets until both the currency and demand uncertainties are resolved and or by buying financial option contracts on the currency exchange rate when capacity commitment is made a mean variance utility function is used to model the firm s risk aversion in decision making we derive the joint optimal capacity and financial option decision and analyze the impact of the delayed allocation option and the financial options on capacity commitment and the firm s performance we show that the firm s financial hedging strategy ties closely to and can have both quantitative and qualitative impact on the firm s operational strategy the use or lack of use of financial hedges can go beyond affecting the magnitude of capacity levels by altering global supply chain structural choices such as the desired location and number of production facilities to be employed to meet global demand

supply contracts profit sharing switching and reaction options a common theme in the studies of flexible supply contracts has been the producer s profit maximization problem without regard to the suppliers reactions however suppliers do react and protect their downside against producer s operating policies by revising their strategies in a manner consistent with their profitmaximization objectives this fact motivates our work using a real options contingent claims approach we analyze and value supply contracts in a setting characterized by exchange rate uncertainty supplier switching options order quantity flexibility profit sharing and supplier reaction options we also use basic diversification concepts from portfolio theory to analyze risk reduction in a unique framework given this setup we explicitly model how flexibility can be mutually beneficial to both the producer and the suppliers using this model we concurrently solve and examine the dual optimization problem for the suppliers and the producer our approach also endogenizes the extent and degree of profit sharing through the resulting optimal policies we also analyze what induces the producer and the suppliers to accept flexibility in their contracts

unionised labour market and strategic production decision of a multinational i show that a foreign firm may sell the same product through both foreign direct investment fdi and export and this decision depends on the size of the product market it happens irrespective of whether the labour market in the domestic country or in the foreign country is unionised unlike the existing works focusing on risk diversification in presence of demand or cost uncertainty i explain the co existence of fdi and export in a world with certainty the endogenous determination of the wage rate plays an important role for my results my analysis shows the effects of the fixed cost of fdi and competition in the product market on the production strategy of the foreign firm

valuing flexibility as a complex option this paper develops an approach for valuing flexible production systems using contingent claims pricing demand curves for our model s underlying assets output products may be downward sloping in contrast with the standard option pricing assumption also our marginal production exercise costs may be increasing in addition we allow for multiple products and a production capacity constraint these elements of the model result in complex exercise decisions for the contingent claims which comprise the production system s value we illustrate our approach by valuing a flexible system that produces two products which have profit margin functions with stochastic parameters

persistent trade effects of large exchange rate shocks this paper presents a theoretical basis for the argument that large exchange rate shocks such as the 1980s dollar cycle may have persistent effects on trade flows and the equilibrium exchange rate itself we begin with a partial equilibrium model in which large exchange rate fluctuations lead to entry or exit decisions that are not reversed when the currency returns to its previous level then we develop a simple model of the feedback from hysteresis in trade to the exchange rate itself here we see that a large capital inflow which leads to an initial appreciation can result in a persistent reduction in the exchange rate consistent with trade balance

an economic model for evaluating mining and manufacturing ventures with output yield uncertainty this paper develops an operational risk management model for evaluating production efforts in manufacturing and mining industries where the resource to be exploited is nonhomogenous using acontingent claims methodology now commonly encountered in financial applications we formulate a production control model in an environment characterized bymarket andprocess uncertainty in our analysis market risk is depicted by the output price while process uncertainty is captured by the random variability inherent in the output s yield in this light adjustments to the rate of production are viewed as a sequence of nested real options affording operating flexibility we account for an optimal sequence of production adjustments over a preestablished production horizon by taking the production rate as an adapted positive real valued process accordingly techniques of stochastic control theory and contingent claims analysis cca are employed to ensure value maximizing production policies are rendered in a manner consistent with an equilibrium price structure

implicit cost allocation and bidding for contracts the question of how or even whether indirect costs should be allocated for pricing decisions has been controversial and unresolved this paper takes a step toward answering this question by examining the special case of a firm that must incur incremental fixed costs to complete any or all of the several projects for which it is submitting simultaneous bids an independent private values bidding model is employed to endogenously determine an optimal cost allocation we term such a cost allocation implicit the optimal implicit fixed cost allocation is shown to fully allocate fixed costs ex ante although the fixed costs may be under over or exactly allocated ex post

timing and eco nomic efficiency of climate friendly investments in supply chains abstract emission trading schemes such as the european union emissions trading system euets attempt to reconcile economic efficiency with ecological efficiency by creating financial incentives for companies to invest in climate friendly innovations using real options methodology we demonstrate that under uncertainty economic and ecological efficiency continue to be mutually exclusive this problem is even worse if a climate friendly project depends on investing in of a whole supply chain we model a sequential bargaining game in a supply chain where the parties negotiate over implementation of a carbon dioxide co2 saving investment project we show that the outcome of their bargaining is not economically efficient and even less ecologically efficient furthermore we show that a supply chain becomes less economically efficient and less ecologically efficient with every additional chain link finally we make recommendations for how managers or politicians can improve the situation and thereby increase economic as well as ecological efficiency and thus also the eco efficiency of supply chains

second best biofuel policies and the welfare effects of quantity mandates and subsidies abstract the quest for biorenewable energy sources is held to justify a number of government interventions including support policies for biofuels such as those responsible for the recent rapid growth of us ethanol production this article provides an analytical assessment of such policies we construct a general equilibrium open economy model that captures the rationale typically invoked to justify government intervention in this setting to alleviate the environmental impact of energy consumption and to decrease us energy dependence on foreign sources the model is used to study both the positive and normative implications of alternative policy instruments including the subsidies and mandates specified by the 2007 energy independence and security act from a positive perspective we find that biofuels mandates are equivalent to a combination of fuel taxes and biofuels subsidies that are revenue neutral from a welfare perspective we show that biofuels mandates dominate biofuels subsidies and that combining fuel taxes with mandates would be welfare enhancing

the substantial bias from ignoring general equilibrium effects in estimating excess burden and a practical solution we show that under typical conditions the simple excess burden triangle formula substantially underestimates the excess burden of commodity taxes in some cases by a factor of 10 or more this formula performs poorly because it ignores general equilibrium interactions most important interactions between the taxed commodity and the labor market many prior studies have shown that general equilibrium interactions affect excess burden but have not appreciated the bias associated with ignoring these interactions or the quantitative importance of this bias we derive an implementable alternative to the simple formula this alternative formula captures interactions that the simple formula omits as a result it is both unbiased and usually more accurate

farm acreage shocks and crop prices an svar approach to understanding the impacts of biofuels the last 10 years have seen tremendous expansion in biofuels production particularly in corn ethanol in the united states at the same time that commodity prices e g corn have experienced significant spikes while supporters claim that biofuels are renewable and carbon friendly concerns have been raised about their impacts on land use and food prices this paper analyzes how us crop prices have responded to shocks in acreage supply these shocks can be thought of as a shock to the residual supply of corn for food using a structural vector auto regression framework we examine shocks to a crop s own acreage and to total cropland this allows us to estimate the effect of dedicating cropland or non crop farmlands to biofuels feedstock production a negative shock in own acreage leads to an increase in price for soybeans and corn our calculations show that increased corn ethanol production during the boom production year 2006 2007 explains approximately 27 of the experienced corn price rise

global facility network design in the presence of competition abstract we study the facility network design problem for a global firm that is a monopolist seller in its domestic market but faces local competition in its foreign market the global firm produces in the face of demand and exchange rate uncertainty but can postpone localization and distribution of the output until after uncertainties are resolved the competitor in the foreign market however enjoys the flexibility of postponing all production activities until after uncertainties are resolved the two firms engage in an ex post cournot competition in the foreign market we consider three potential network configurations for the global firm under a linear demand function we provide the necessary and sufficient condition that one of the three networks is the global firm s optimal choice and explore how the presence of foreign competition affects the sensitivity of the global firm s design to various cost parameters and market uncertainties

strategic commitment versus postponement in a two tier supply chain abstract in this paper the trade off between strategic commitment and operational flexibility is examined as it arises in a supply chain when a supplier offers competing buyers opportunities to make early purchase commitments for a product with a short life cycle traditionally the use of incentives for early purchase commitments for short life cycle products has been justified on the basis of a supplier s production lead times or capacity constraints an alternative explanation has been proposed by offering early purchasing opportunities a supplier can influence the form of competition in the downstream market using a single period model it has been shown that below a threshold level of demand uncertainty the supplier can benefit from providing adequate pricing incentives to entice downstream buyers to commit to purchase quantities before demand information is revealed moreover such early purchasing opportunities can benefit the supplier as well as the buyers even in the absence of production lead times or capacity constraints

optimal operating policies in the presence of exchange rate variability we study the structure of the optimal policies for a firm operating plants in different countries the relative costs of production between the plants are assumed to vary over time due to economic and political factors such as exchange rates inflation taxes and tariffs based on the costs the firm can alter the quantity produced in each plant we determine the structure of the optimal policies for deciding when and by how much to alter the production quantities when the switch over costs are linear or step functions regardless of whether the variable production costs are concave or piece wise linear convex and regardless of whether the firm is supplying one or more markets the optimal policy is always a barrier policy the optimal barriers can be determined by using linear programming techniques and the optimal costs can be computed by solving a system of linear equations when the number of optimal barriers is two the optimal expected costs and the condition that determines the optimal barriers are explicitly derived