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

exact and heuristic solutions of the global supply chain problem with transfer pricing we examine the example of a multinational corporation that attempts to maximize its global after tax profits by determining the flow of goods the transfer prices and the transportation cost allocation between each of its subsidiaries vidal and goetschalckx vidal c j goetschalckx m 2001 a global supply chain model with transfer pricing and transportation cost allocation european journal of operational research 129 1 134 158 proposed a bilinear model of this problem and solved it by an alternate heuristic we propose a reformulation of this model reducing the number of bilinear terms and accelerating considerably the exact solution we also present three other solution methods an implementation of variable neighborhood search vns designed for any bilinear model an implementation of vns specifically designed for the problem considered here and an exact method based on a branch and cut algorithm the solution methods are tested on artificial instances these results show that our implementation of vns outperforms the two other heuristics the exact method found the optimal solution of all small instances and of 26 of medium instances

optimal policies for a capacitated two echelon inventory system this paper demonstrates optimal policies for capacitated serial multiechelon production inventory systems extending the clark and scarf 1960 model to include installations with production capacity limits we demonstrate that a modified echelon base stock policy is optimal in a two stage system when there is a smaller capacity at the downstream facility this is shown by decomposing the dynamic programming value function into value functions dependent upon individual echelon stock variables we show that the optimal structure holds for both stationary and nonstationary stochastic customer demand finite horizon and infinite horizon results are included under discounted cost and average cost criteria

measuring the opportunity cost of holding money more evidence on the term structure of interest rates abstract this paper tests the statistical importance and forecasting performance of a term structure money demand equation relative to two competing specifications the evidence indicates that the term structure specification is preferred to one using a long term interest rate but not a short term rate forecasts for 1981 1982 reveal that the term structure model is preferable to both alternatives

foreign direct investment and inflation author affiliation selin sayek department of economics bilkent university bilkent ankara 06800 turkey e mail sayek bilkent edu tr acknowledgment i am very grateful to my advisor kent kimbrough for his support and help without which this research wouldn t have been possible i would also like to thank robert conrad enrique mendoza ed tower and dennis yang for their guidance and helpful comments i have also received valuable comments from duke university macroeconomics workshop participants and royal economic society 2001 conference participants as well as the two referees all errors remain mine 1 introductionin recent years interest in understanding the determinants of foreign direct investment fdi has intensified hand in hand with an increasing volume of fdi flows from 1990 to 2005 the total worldwide fdi inflows increased from 203 billion to 974 billion almost all developing countries are competing to attract a major share of these inflows in fact the share of net fdi inflows in the gross domestic product gdp of middle income countries has risen from 0 74 in the 1970s to 1 08 between 1985 and 1994 and to 2 85 between 1995 and 2005 1 the intensified competition to attract more fdi has led to changes in the regulatory frameworks provided by almost all countries according to the recent world investment report unctad 2003 during the period 1991 2002 around 95 of the changes in worldwide laws governing fdi have been favorable to multinational firm activity establishment of investment promotion agencies as well as provision of fiscal incentives have accompanied these improvements in local regulatory environments given the objectives of host countries to attract high quality investments and to ensure benefits from such foreign activity it is important to fully understand the factors influencing the fdi flows this article primarily studies the role of inflation among the factors that drive fdi inflation rates have increased from around 5 to 10 on average in developing countries during the 1970s followed by an increase of 49 on average among developing countries between 1985 and 1994 this trend of increasing inflation rates has been reversed in the late 1990s the inflation rates in developing countries have on average declined to 9 2 during 1995 2004 a period during which the net fdi inflows as a share of gdp have more than doubled in the middle income countries given the focus among developing countries to attract more fdi it is interesting to analyze whether the increasing inflation rates in the 1970s and 1980s might have been a deterrent for fdi inflows and whether their reversal in the 1990s might have contributed to the increase in fdi inflows to these economies despite not providing conclusive evidence the coincidences of high inflation and low fdi versus the low inflation and high fdi inflows into these developing countries motivates investigation of the possible links between the two variables therefore the broad objective of this framework is to study the effects of inflation on the investment decision of multinational enterprises mnes changes in inflation rates of the domestic or foreign country are anticipated to alter the net returns and optimal investment decisions of the mne in studying the explicit role of inflation in determining the investment pattern of mnes across domestic and foreign locations i use a model that is in fact discussing an investment smoothing behavior of the mne that faces domestic and foreign nominal shocks in this framework the act of investment smoothing captures a shift of investments across locations and not across time my argument is in line with aizenman 1992 who notes that the goal of diversifying exposure to country specific shocks induces producers to become multinationals this investment smoothing behavior can further be thought of as a production flexibility approach where the mne can shift production and trade decisions depending on the relative favorability of conditions in the two countries as discussed in sung and lapan 2000

the effect of term structure of interest rates on the demand for money in the united states this note describes an experiment in incorporating the term structure of interest rates rather than a few selected interest rates in a demand for money equation the computed equation is for the united states is based on data for the period from 1873 to 1975 and takes a business cycle phase expansion or contraction as the basic time unit this note has two parents a purely theoretical analysis of money demand by one of us which concludes that the whole term structure of interest rates is relevant to the demand for money friedman 1977 and an empirical test of that conclusion with post world war ii quarterly u s data heller and khan 1979 the success of that test induced us to make a similar test with our phase average data covering a century

exchange rate and chinese outward fdi abstractdid the exchange rate er regime change that was announced by the chinese government in 2005 lead to an increased sensitivity of chinese multinational companies mncs to er fluctuations to answer this question our article considers the effect of er level volatility and expectation on the chinese outward foreign direct investment ofdi activities in 119 countries for a period of 2003 2013 we find striking evidence that chinese renminbi appreciation has a negative impact on chinese outward fdi flows and both higher er volatility and expected depreciation encourage chinese outward fdi flows we introduce two complementary effects that explain these findings repatriation effect and mercantilist effect in view of the recent debate about the growing importance of chinese renminbi in the international transactions we believe that our research results shed light on the possible impact of er policies on chinese mncs behaviour and global fdi distribution

foreign direct investment exchange rate variability and demand uncertainty variable real exchange rates influence the location of production facilities chosen by a multinational with risk averse investors and fixed productive factors parent companies should not be indifferent to production location even with identical expected costs of production across countries if a nonnegative correlation exists between export demand and exchange rate shocks the multinational optimally locates some productive capacity abroad the capacity share abroad increases as exchange rate volatility rises and becomes more correlated with export demand shocks these results are confirmed using quarterly u s bilateral foreign direct investment flows with canada japan and the united kingdom copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

lower bounds for multi echelon stochastic inventory systems we establish lower bounds on the minimum cost of managing certain production distribution networks with setup costs at all stages and stochastic demands these networks include serial assembly and one warehouse multi retailer systems we obtain the bounds through novel cost allocation schemes we evaluate the bounds performance for one warehouse multi retailer systems by comparing them with simple heuristic policies the bounds are quite tight for systems with a small number of retailers we also present simplified proof of known optimality results for serial and assembly systems

fair transfer price and inventory holding policies in two enterprise supply chains abstract a key issue in supply chain optimisation involving multiple enterprises is the determination of policies that optimise the performance of the supply chain as a whole while ensuring adequate rewards for each participant in this paper we present a mathematical programming formulation for fair optimised profit distribution between echelons in a general multi enterprise supply chain the proposed formulation is based on an approach applying the nash bargaining solution for finding optimal multi partner profit levels subject to given minimum echelon profit requirements the overall problem is first formulated as a mixed integer non linear programming minlp model a spatial and binary variable branch and bound algorithm is then applied to the above problem based on exact and approximate linearisations of the bilinear terms involved in the model while at each node of the search tree a mixed integer linear programming milp problem is solved the solution comprises inter firm transfer prices production and inventory levels flows of products between echelons and sales profiles the applicability of the proposed approach is demonstrated by a number of illustrative examples based on industrial processes

a global supply chain model with transfer pricing and transportation cost allocation abstract we present a model for the optimization of a global supply that maximizes the after tax profits of a multinational corporation and that includes transfer prices and the allocation of transportation costs as explicit decision variables the resulting mathematical formulation is a non convex optimization problem with a linear objective function a set of linear constraints and a set of bilinear constraints we develop a heuristic solution algorithm that applies successive linear programming based on the reformulation and the relaxation of the original problem our computational experiments investigate the impact of using different starting points the algorithm produces feasible solutions with very small gaps between the solutions and their upper bound ub

a multiechelon inventory problem with secondary market sales we consider a finite horizon multiechelon inventory system in which the surplus of stock can be sold i e disposed in the secondary markets at each stage in the system what are called nested echelon order up to policies are shown to be optimal for jointly managing inventory replenishments and secondary market sales under a general restriction on model parameters we establish that it is optimal not to both sell off excess stock and replenish inventory secondary market sales complicate the structure of the system so that the classical clark and scarf echelon reformulation no longer allows for the decomposition of the objective function under the optimal policy we introduce a novel class of policies referred to as the disposal saturation policies and show that there exists a disposal saturation policy determined recursively by a single base stock level at each echelon that achieves the decomposition of this problem the resulting optimal replenishment policy is shown to be the echelon base stock policy we demonstrate the heuristic performance of this disposal saturation policy through a series of numerical studies except at extreme ranges of model parameters the policy provides a very good approximation to the optimal policy while avoiding the curse of dimensionality we also conduct numerical studies to determine the value of the secondary markets for multistage supply chains and assess its sensitivity to model parameters the results provide potentially useful insights for companies seeking to enter or develop secondary markets for supply chains this paper was accepted by martin lariviere operations management

an operational profit sharing and transfer pricing model for network manufacturing companies abstract new age companies are forging partnerships with other firms to market products that have been assembled through manufacturing activities distributed at different locations these locations belong to more than one company and the product passes through these different sites during its manufacturing stages this manufacturing collaboration is known as network manufacturing according to the network philosophy companies form alliances to manufacture a product and share in its operating profits this paper proposes a framework and methodology for profit sharing and transfer pricing between network companies we propose a paradigm that enables maximization of operating profits by the manufacturing network in its larger supply chain suggesting a departure from the model that maximizes profits for the individual company within the sphere of its own supply chain

strategic foreign direct investment and exchange rate uncertainty we investigate how exchange rate uncertainty affects the foreign direct investment decision of a risk neutral multinational firm mnf we assume the firm can open plants each with decreasing average costs in two different countries under certainty the mnf would open only one plant we demonstrate that with sufficient exchange rate volatility the firm can increase expected profits by opening several plants we also show that if the mnf faces a competitor in the foreign market the exchange risk by inducing the mnf to open plants in both markets may prevent entry by the local competitor

newsvendor bounds and heuristic for optimal policies in serial supply chains we consider the classicn stage serial supply systems with linear costs and stationary random demands there are deterministic transportation leadtimes between stages and unsatisfied demands are backlogged the optimal inventory policy for this system is known to be an echelon base stock policy which can be computed through minimizingn nested convex functions recursively to identify the key determinants of the optimal policy we develop a simple and surprisingly good heuristic this method minimizes 2 n separate newsvendor type cost functions each of which uses the original problem data only these functions are lower and upper bounds for the echelon cost functions their minimizers form bounds for the optimal echelon base stock levels the heuristic is the simple average of the solution bounds in extensive numerical experiments the average relative error of the heuristic is 0 24 with the maximum error less than 1 5 the bounds and the heuristic which can be easily obtained by simple spreadsheet calculations enhance the accessibility and implementability of the multiechelon inventory theory more importantly the closed form expressions provide an analytical tool for us to gain insights into issues such as system bottlenecks effects of system parameters and coordination mechanisms in decentralized systems

simultaneous capacity and production management of short life cycle produce to stock goods under stochastic demand this paper derives the optimal simultaneous capacity and production plan for a shortlife cycle produce to stock good under stochastic demand capacity can be reduced as well as added at exogenously set unit prices in both cases studied with and without carryover of unsold units a target interval policy is optimal there is a usually different target interval for each period such that capacity should be changed as little as possible to bring the level available into that interval our contribution in the case of no carry over is a detailed characterization of the target intervals assuming demands increase stochastically at the beginning of the life cycle and decrease thereafter in the case of carry over we establish the general result and show that capacity and inventory are economic substitutes the target intervals decrease in the initial stock level and the optimal unconstrained base stock level decreases in the capacity level in both cases optimal service rates are not necessarily constant over time a numerical example illustrates the results

the merits of horizontal versus vertical fdi in the presence of uncertainty we examine the impact of uncertainty on vertical and horizontal fdi our model shows that greater supply uncertainty reduces the expected income from vertical fdi but increases the expected income from horizontal fdi greater demand uncertainty adversely affects the expected income under both production modes uncertainty about predatory actions by the host country is more costly to the multinational under vertical than under the horizontal mode we examine sales by foreign affiliates of u s parent companies conditioning on host country characteristics thought to influence fdi we find evidence that volatility and sovereign risk have a greater negative impact on vertical fdi than on horizontal fdi

pre commitment and flexibility abstract this paper considers several related strategic duopoly settings in which uncertainty creates an option value from retaining flexibility by delaying investment or output decisions until after uncertainty is resolved this value of flexibility must be weighed against the strategic value of pre commitment yielding a trade off between flexibility and pre commitment we obtain a simple characterization of the timing of output decisions as a consequence of the degree of uncertainty particular attention is paid to the implications for entry deterrence by an incumbent firm and to the possible flexibility enhancing effects of investment in capital

going multinational under exchange rate uncertainty abstract we analyze a model where an exporting firm competes a la cournot in a foreign market the firm faces exchange rate uncertainty and has the option to invest abroad the paper contributes four results first real option pricing techniques are used to derive the optimal timing rule of the investment and the price of the firm and foreign competitors second the sunk cost of entry into the foreign market introduces hysteresis in direct investment flows we find that the degree of hysteresis grows with the number of firms in the industry third we determine the conditions under which dumping may appear and the role of fdi in precluding this type of dumping fourth tariffs have the well known fdi inducing effect more so in less competitive markets and are more effective at deterring delocation furthermore a tariff might have the effect of triggering dumping

the price of reverse factoring financing rates vs payment delays reverse factoring a financial arrangement where a corporation facilitates early payment of its trade credit obligations to suppliers is increasingly popular in industry many firms use the scheme to induce their suppliers to grant them more lenient payment terms by means of a periodic review base stock model that includes alternative sources of financing we explore the following question what extensions of payment terms allow the supplier to benefit from reverse factoring we obtain solutions by means of simulation optimisation we find that an extension of payment terms induces a non linear financing cost for the supplier beyond the opportunity cost of carrying additional receivables furthermore we find that the size of the payment term extension that a supplier can accommodate depends on demand uncertainty and the cost structure of the supplier overall our results show that the financial implications of an extension of payment terms need careful assessment in stochastic settings

joint inventory and cash management for multidivisional supply chains this paper develops a centralized supply chain model that integrates material flows with cash flows the supply chain is owned by a single firm with two divisions the downstream division headquarters facing random customer demand replenishes materials from the upstream division the firm installs a financial services platform that pools the divisions cash into a master account managed by the headquarters in each period cash is received from customers and paid to the outside vendor after materials are delivered the headquarters determines how much cash to retain for inventory replenishment the objective is to determine an optimal joint inventory replenishment and cash retention policy for the entire supply chain we prove that the optimal policy has a surprisingly simple structure both divisions implement a base stock policy for inventory replenishment the headquarters monitors the corporate working capital and implements a two threshold policy for cash retention this result is obtained by exte

combined pricing and inventory control under uncertainty this paper addresses the simultaneous determination of pricing and inventory replenishment strategies in the face of demand uncertainty more specifically we analyze the following single item periodic review model demands in consecutive periods are independent but their distributions depend on the item s price in accordance with general stochastic demand functions the price charged in any given period can be specified dynamically as a function of the state of the system a replenishment order may be placed at the beginning of some or all of the periods stockouts are fully backlogged we address both finite and infinite horizon models with the objective of maximizing total expected discounted profit or its time average value assuming that prices can either be adjusted arbitrarily upward or downward or that they can only be decreased we characterize the structure of an optimal combined pricing and inventory strategy for all of the above types of models we also develop an efficient value iteration method to compute these optimal strategies finally we report on an extensive numerical study that characterizes various qualitative properties of the optimal strategies and corresponding optimal profit values

coordination mechanisms in decentralized serial inventory systems with batch ordering this paper studies a periodic review serial supply chain in which materials are ordered and shipped according to r nq policies three information scenarios are considered depending on the level of information available echelon local and quasilocal in the echelon scenario each stage can access the inventory and cost information within its echelon comprising the stage itself and all downstream stages in the local scenario each stage only accesses its own local information finally in the quasilocal scenario each stage knows its local information plus the actual customer demands we propose coordination schemes that regulate the stages to achieve the supply chain s optimal cost under each information setting all these coordination schemes fit comfortably within an emerging practice called supply chain finance which includes the organization and technology needed to implement them

analysing the effects of labour standards on us export performance a time series approach with structural change the empirical effects of different measures of labour standards on the export performance of the united states are analysed using annual data for the period 1950 1998 applying a time series approach based on the structural change literature hence a model with endogenous breaks is estimated following the methodology proposed by bai and perron econometrica 66 47 78 1998 the results show that the labour standards represented by the number of hours worked the rate of occupational injuries and the unionization rate are all very important to explain the behaviour of exports for the united states in particular it is found that low labour standards may both improve or lead to a deterioration in export performance

real exchange rate risk expectations and the level of direct investment four models of direct investment are analyzed assuming various relationships between foreign and domestic production the direct effect of risk adjusted expected real foreign currency appreciation is to lower foreign capital cost thus stimulating direct investment however when costs of other inputs are also affected induced productivity changes or output price changes may offset the direct effect reducing direct investment pooled estimation results for u s annual bilateral direct investment flows to five industrialized countries show significant reductions associated with expected appreciation of real foreign currency and significant increases associated with risk these results are consistent with the model where in response to risk the multinational firm reduces exports to the foreign country but offsets this somewhat by increasing foreign capital input and production

money demand and the term structure of interest rates some consistent estimates heller and khan 1979 hereafter hk employ a quadratic function of the term structure of interest rates to obtain quarterly coefficient estimates of its level slope and curvature these estimates are substituted for the interest rate variable in a short run money demand function hk conclude that their specification is stable during the turbulent 1972 1974 period this note shows that hk s stability findings are dependent upon their use of the cochrane orcutt iterative technique hereafter corc not the inclusion of term structure variables we show that money demand equations incorporating term structure information specifically the specifications of hk bilson and hale 1980 hereafter bh and our own which uses a cubic function of the term structure are not stable when the hatanaka 1974 hereafter hat procedure is employed to correct for serial correlation

recent trends and structural breaks in us and eu15 labour productivity growth this article examines shifts in labour productivity growth in the us and in europe between 1970 and 2007 based on econometric tests of structural breaks additionally it makes use of time series based projections of labour productivity growth up to 2009 in order to detect breaks depending on confidence intervals of the projections the identification of structural breaks in the us labour productivity growth is far from obvious a statistically significant break is found in the late 1990s only if at least the 97 5th percentile of forecasts materializes in the future which means that despite a clear pick up in productivity growth in the second half of the 1990s the size of the hump is not large enough compared with past variations to make this change a statistically significant break however a significant break point is detected in the mid 1990s for the difference in labour productivity growth between the us and the eu15 even when controlling for the convergence of europe towards the us productivity l

interrelating operational and financial performance measurements in inventory control financial supply chain management and working capital management are increasingly receiving attention as important avenues to increase profitability in supply chains by actively managing payment terms and working capital requirements managers can influence financial performance and achieve significant cost savings however measures to improve financial performance implicitly restrict and influence operational performance in our research we elaborate on the benefits of equally considering both operational and financial aspects in decision making for the physical and financial supply chain we develop a mathematical model that determines the optimal purchasing order quantity under working capital restrictions and payment delays we analyze the trade offs between the most commonly used financial and operational measurements such as service level return on investment profit margin and inventory level our results demonstrate the significance of payment delays increases decreases in the upstream downstream payment delays favor the system s operations by decreasing operational costs moreover increases in the working capital employed in the system decrease the total operational cost increase the total financial cost and lower the return on working capital investment c 2009 elsevier b v all rights reserved

which exchange rates matter for fdi evidence for japan using industry level data for japanese foreign direct investment fdi flows to five asian countries we investigate how the sensitivity of fdi to the exchange rate changes across different industry types and exchange rate indices key results are as follows i aggregated fdi data reported at the national level are insufficient for analysis and industry level data are required ii pooling industries by export orientation reveals heterogeneity in the response of different types of fdi to the exchange rates and iii alternative exchange rate measures particularly the competitor weighted exchange rate perform better for export oriented fdi we use our results to address key conflicts in the literature on exchange rates and fdi

inventory management with asset based financing most of the traditional models in production and inventory control ignore the financial states of an organization and can lead to infeasible practices in real systems this paper is the first attempt to incorporate asset based financing into production decisions instead of setting a known exogenously determined budgetary constraint as most existing models suggest we model the available cash in each period as a function of assets and liabilities that may be updated periodically according to the dynamics of the production activities furthermore our models allow different interest rates on cash balance and outstanding loans which is an enhancement over most traditional models in that inventory financed by a loan may be more expensive than that by out of pocket cash we demonstrate the importance of joint consideration of production and financing decisions in a start up setting in which the ability to grow the firm is mainly constrained by its limited capital and dependence on bank financing we then explain the motivation for asset based financing by examining the decision making at a bank and a set of retailers in a newsvendor setting