Abstract
Exchange rate fluctuations represent a challenge for the internationalization of all firms, both big and small. This paper reflects on two aspects of the exchange rate challenge - (i) the exchange rate pass-through and (ii) hedging of exchange rate risk and how SMEs manage these two aspects of exchange rate risk. The exchange rate challenges that SMEs face might differ from the risks larger firms are exposed to, and their management of the risks might vary. In family-owned SMEs, longer planning horizons than listed firms might imply a weaker exchange rate pass-through, while smaller financial buffers might pull pass-through rules in the opposite direction for the same SMEs. When considering hedging, the paper argues for both operational hedging and external hedging to represent a management challenge for SMEs, pushing the exchange rate risk towards the forefront of the factors hampering internationalization among SMEs.
Highlights
The paper is concerned with how small- and medium sized enterprises (SMEs) manage the exchange rate challenges they face when entering foreign markets
This paper reflects how SMEs manage their exchange rate challenges and benchmarks the reflections on SMEs’ management of exchange rate risk to the textbook description of how big(ger) exporters manage the exchange rate challenges they face in international markets
The family dominated ownership structure might allow for longer planning horizons among SMEs
Summary
The paper is concerned with how small- and medium sized enterprises (SMEs) manage the exchange rate challenges they face when entering foreign markets. Using the textbook method as a benchmark, the paper demonstrates strategies to manage exchange rate risk among SMEs. As textbooks often analyze large(er) firms, this approach implicitly compares SMEs’ behavior to big(ger) exporting firms. As textbooks often analyze large(er) firms, this approach implicitly compares SMEs’ behavior to big(ger) exporting firms The paper reflects both on whether the literature distinguishes the exchange rate challenge concerning an exporter’s size and whether these exporters manage their exchange rate challenges differently. The paper reflects on how SMEs’ characteristics, such as ownership structure, product characteristics, funding, and location (relative to funding sources) impact foreign market-based pricing rules among SMEs (Achterberg, Omar, Ambituuni, & Roll, 2018) for an introduction to foreign trade and foreign market pricing). The third section considers SME's foreign market pricing rules and different exchange rate passthrough components relevant to SMEs’ exchange rate risk.
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