Characteristic Economic Effects of Exchange Rate Changes on Multinational Corporations
Note: To interpret this chart, and taking the impact of a devaluation on local demand as an example, it is assumed that if import competition is weak, local prices will climb slightly, if at all; in such a case, there would be a sharp contraction in parent-company revenue. If imports generate strong competition, local-currency prices are expected to increase, although not to the full extent of the devaluation; in this instance, only a moderate decline in parent-company revenue would be registered.
Source: Alan C. Shapiro, “Developing a Profitable Exposure Management System,” reprinted from p. 188 of the June 17, 1977, issue of Business International Money Report, with the permission of the Economist Intelligence Unit, NA, Incorporated.
Similarly, a facility producing solely for the domestic market and using only domestic sources of inputs can be strongly affected by currency changes, even though its accounting exposure is zero. Consider, for example, a Ford factory in Detroit that produces cars for sale only in the United States and uses only U.S. labor and materials. Because it buys and sells only in dollars, this factory has no accounting exposure. However, because its cars are subject to competition from foreign imports, this plant will be hurt by appreciation of the dollar. Conversely, a dollar decline will enhance its competitive position and boost its profits.