Do Multinationals Operate Flexibly? Theory and Evidence

Abstract

Do multinational enterprises operate flexibly, i.e., do they shift production in response to currency changes? Three theoretical perspectives are developed. Flexibility optimism, premised on information and sunk cost advantages, takes a macro efficiency perspective and predicts sizable responses. Flexibility pessimism, premised on inertia and internal opportunism, takes an organizational perspective and predicts sticky responses. Flexibility realism, premised on the view that to be flexible in the current period multinational enterprises need to have planned and invested accordingly in previous periods, predicts positive, but relatively modest, responses. Empirical analysis spanning the period 1977-1993 finds that multinational enterprises systematically exploit currency shifts, but even in the face of large exchange rate changes, their operational responses are relatively modest. The results appear most consistent with flexibility realism, and this hypothesis is selected over the alternatives considered.