Do multinational corporations flexibly respond to exchange rate fluctuations? A tale of two Korean MNCs

Abstract

PurposeThe purpose of this paper is to examine whether Korean multinational corporations (MNCs) in the electronics and steel industries do shift their production across their foreign subsidiaries, located in different countries, as exchange rates fluctuate in foreign countries.Design/methodology/approachA case study was taken as a qualitative methodology to examine whether MNCs actually shift their production as multinational operational flexibility perspective predicts.FindingsFrom a case study of two Korean MNCs (LG Electronics and POSCO), it was found that even facing heightened production costs associated with host country currency appreciation, Korean MNCs do not shift their production to less costly locations due to industrial characteristics, limited capacity, and high tariff barriers. It was also found that they reduce the production costs internally and they also negotiate the costs with employees and suppliers to adjust the production costs associated with appreciated currency.Practical implicationsOur findings imply that certain industrial and environmental constraints make it difficult for MNCs to take flexible actions as multinational operational flexibility perspective predicts. The findings also shed additional light on the less‐explored argument over operational flexibility and vertical integration associated with cross‐country shifts of value chain activities, including production or sales.Originality/valueAlmost all literature taking the multinational operation flexibility view argues that MNCs are able to shift their productions for their own benefits. However, the authors of this paper find from their case studies that firms take advantage of other methods than production shifts in their responses to exchange rate fluctuations in their host countries. Thus this study gives an insight into when and how firms behave as the theory predicts.