This chapter examines Lessard and Lightstone's recommendations for how MNEs should deal with economic exposure. Economic exposure (also known as operating exposure) is the impact (i.e., the effect on the net present value of the MNE's future income streams) of changes in real exchange rates relative to the MNE's competitors. To minimize this impact, Lessard and Lightstone recommend that senior managers strive to (1) have a flexible sourcing structure (i.e., be able to shift production from one country to another quickly and efficiently), and (2) attain the capability to engage in exchange rate pass through (i.e., the capability to raise prices in response to exchange rate fluctuations without losing sales volume). To obtain this second capability, senior managers should try to obtain a market leadership position with highly differentiated products. According to Lessard and Lightstone, senior managers at MNEs should take economic exposure into account when determining their international business strategy (e.g., the likelihood of negative currency fluctuation should be taken into account when assessing location advantages). Lessard and Lightstone also present other specific strategies that senior managers at MNEs can use to minimize their economic exposure. These ideas will be examined and then criticized using the framework presented in Chapter 1.

Significance

D. R. Lessard and J. B. Lightstone's classic HBR article on the risk created by volatile exchange rates adds useful aspects of international finance to the discussion of MNE strategies.