Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
481072 | European Journal of Operational Research | 2010 | 11 Pages |
Abstract
Firms employing offshore outsourcing strategies may face both exchange rate and demand uncertainties. In this paper, we show that the firms may benefit from operational option to switch production by keeping capacities with both domestic and foreign suppliers. The value of the operational option increases as the exchange rate uncertainty or demand uncertainty increases. In addition, when the firms become risk-averse, they may use domestic capacity to hedge against offshore capacity. As a result, the firms may choose to hold local capacity even if it exhibits negative marginal contribution to the profit. Furthermore, risk-averse firms may keep more total capacity than risk-neutral firms.
Related Topics
Physical Sciences and Engineering
Computer Science
Computer Science (General)
Authors
Shanling Li, Letian Wang,