Template-type: ReDIF-Paper 1.0
Author-Name: Laixun Zhao
Author-Name-First: Laixun
Author-Name-Last: Zhao
Author-Workplace-Name: Hokkaido University
Author-Workplace-Homepage: http://www.hokudai.ac.jp/
Author-Name: Yuqing Xing
Author-Name-First: Yuqing
Author-Name-Last: Xing
Author-Workplace-Name: International University of University
Author-Workplace-Homepage: http://www.iuj.ac.jp/
Title: Currency Devaluation and Global Outsourcing
Abstract: This paper models the production allocation choices of a multinational enterprise (MNE) in a three-country framework -- a northern country and two southern countries. The products made in the southern countries are of lower quality, and have higher substitutability than those between the south and the north. We investigate how exchange rate changes affect production, employment, profits and welfare, and find that currency devaluation from different countries gives a rise to contrasting and unconventional results. In particular, a currency appreciation in the southern country (X) producing the lowest-quality good with the lowest wage may reduce production (employment) in the north, while an appreciation in the other southern currency (Y) always raises production in the north. A northern depreciation against both southern currencies may increase production in country X, but always reduces that in country Y. These arise because the MNE shifts production to minimize costs. Under such global outsourcing, northern welfare always falls following currency appreciation in southern countries.
Classification-JEL: F1
Length: 27 pages
Creation-Date: 2003-10
Number: EMS_2003_04
File-URL: https://www.iuj.ac.jp/workingpapers/index.cfm?File=EMS_2003_04.pdf
File-Format: Application/pdf
File-Function: First version, 2003
File-Size: 137KB
Keywords: FDI Outsourcing, Exchange Rate, Product Differentiation, China
Handle: RePEc:iuj:wpaper:EMS_2003_04