Build to order and entry/exit strategies under exchange rate uncertainty

Abstract

Under uncertainty of exchange rate, we extend the build to order production model of Lin et al. (2002) by considering the export-oriented manufacturer to make decisions to switch production location freely between domestic and foreign ones. The export-oriented manufacturer is risk neutral and has rational expectations. When we transfer the production location from domestic (foreign) to foreign (domestic), and the production location transferring cost and the drift of real exchange rate are both equal to zero, then the optimal entry and exit threshold value of Cobb-Douglas production function are equal, no matter whether we use real options or net present value method. Thus export-oriented manufacturer can make decisions at the optimal transfer threshold value for transferable locations wherever the production locations are. It provides the export-oriented manufacturer with another way of thinking.