Prof. Marina Whitman Plays Key Role in Conference Board Study
Survey finds that market opportunity, political risk and legal environment are more important than exchange rate volatility in companies' investment decisions.
ANN ARBOR, Mich. Exchange rate volatility has relatively little impact on where companies decide to invest their money, according to a recent study chaired by Michigan Business School Professor Marina Whitman.
The Conference Board and the Group of Thirty, independent economic-research organizations, released the study last month.
Whitman, professor of business administration and public policy and a member of the Group of Thirty, says the study examined an array of business investment drivers to identify the relative role of exchange rates. It was based on responses from nearly 400 chief executive and chief financial officers in 38 countries worldwide.
Global businesses take exchange rates into consideration in making investment decisions, but market opportunity, political risk and the legal environment are all more important for foreign investment decisions than exchange rate risks, Whitman says.
"Almost two-thirds of the responses indicated that exchange rates were somewhat important in their investment decisions, but global businesses appear to seek profitable markets first and manage the exchange rate risks that come with the territory," Whitman says.
According to the study, exchange rate risk/volatility was "very important" to 20 percent of the responding companies. On the other hand, more than 80 percent of the respondents cited market opportunity, more than 60 percent said political risk and half indicated the legal environment as "very important" factors in their foreign investment decisions.
"Many of the traditional methods of coping, like financial hedging and/or adjusting prices for exchange rates, have significant costs and are undoubtedly a management headache but do not seem to shape the global presence, even of emerging market companies, in a major way," Whitman says.
A surprising finding of the studyand one with the greatest policy implicationsis the extent to which businesses do not feel bound by their home currency in international transactions. More than 50 percent of companies based abroad use the U.S. dollar to set prices and buy materials, while 25 percent of non-euro companies use the euro.
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