Management of Exchange Rate Risk in SMEs
Reflections on Exchange Rate Pass-through and Hedging of Currency Risk
Article Sidebar
Main Article Content
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.
Downloads
Article Details
Copyright (c) 2020 Imtiaz Badshah, Trond-Arne Borgersen
This work is licensed under a Creative Commons Attribution 4.0 International License.
Achterberg, L. H., Omar, M., Ambituuni, A., & Roll, O. (2018). Facts or gut feelings: analysis of external pricing antecedents for SMEs in Germany. Journal of Small Business and Enterprise Development, 25(6), 886-901. doi: doi:10.1108/JSBED-12-2017-0398 DOI: https://doi.org/10.1108/JSBED-12-2017-0398
Allayannis, G., Ihrig, J., & Weston, J. P. (2001). Exchange-rate hedging: Financial versus operational strategies. American Economic Review, 91(2), 391-395. DOI: https://doi.org/10.1257/aer.91.2.391
Álvarez-Díez, S., Alfaro-Cid, E., & Fernández-Blanco, M. O. (2016). Hedging foreign exchange rate risk: Multi-currency diversification. European Journal of Management and Business Economics, 25(1), 2-7. doi: https://doi.org/10.1016/j.redee.2015.11.003 DOI: https://doi.org/10.1016/j.redee.2015.11.003
Amiti, M., Itskhoki, O., & Konings, J. (2014). Importers, Exporters and Exchange Rate Disconnect American Economic Review, 104(7), 1942-1978. DOI: https://doi.org/10.1257/aer.104.7.1942
Baldwin, R., & Krugman, P. (1989). Persistent Trade Effects of Large Exchange Rate Shocks. The Quarterly Journal of Economics, 104(4), 635-654. doi: 10.2307/2937860 DOI: https://doi.org/10.2307/2937860
Bartram, S. M. (2008). What lies beneath: Foreign exchange rate exposure, hedging and cash flows. Journal of Banking & Finance, 32(8), 1508-1521. doi: https://doi.org/10.1016/j.jbankfin.2007.07.013 DOI: https://doi.org/10.1016/j.jbankfin.2007.07.013
Bartram, S. M., Brown, G. W., & Minton, B. A. (2010). Resolving the exposure puzzle: The many facets of exchange rate exposure. Journal of Financial Economics, 95(2), 148-173. doi: https://doi.org/10.1016/j.jfineco.2009.09.002 DOI: https://doi.org/10.1016/j.jfineco.2009.09.002
Bell, J., Crick, D., & Young, S. (2004). Small Firm Internationalization and Business Strategy:An Exploratory Study of ‘Knowledge-Intensive’ and ‘Traditional’ Manufacturing Firms in the UK. International Small Business Journal, 22(1), 23-56. doi: 10.1177/0266242604039479 DOI: https://doi.org/10.1177/0266242604039479
Bell, J., McNaughton, R., Young, S., & Crick, D. (2003). Towards an Integrative Model of Small Firm Internationalisation. Journal of International Entrepreneurship, 1(4), 339-362. doi: 10.1023/A:1025629424041 DOI: https://doi.org/10.1023/A:1025629424041
Borgersen, T. A. (2005). SMEs in Developing Countries and the Problem of Exporting: Market Entry Costs, Exchange Rate Shocks and the Capital Structure of Firms. Journal of African Policy Studies, 10(1), 87-109.
Borgersen, T. A. (2006). When Experience Matters: The Export Performance of Developing Countries' SMEs. Journal of Sustainable Development in Africa, 8(1), 106-118.
Borgersen, T. A. (2007). Pricing of exports: exchange rate pass-through and the planning horizon of firms. Global Business and Economics Review, 9(1), 8-18. DOI: https://doi.org/10.1504/GBER.2007.012506
Borgersen, T. A. (2016). The Exchange Rate Response of Credit-Constrained Exporters: The Role of Location. Theoretical Economics Letters, 6(5), 927-941. DOI: https://doi.org/10.4236/tel.2016.65096
Bose, T. K. (2016). Critical Success Factors of SME Internationalization. Journal of Small Business Strategy, 26(2), 87-109.
Boyabatli, O., & Toktay, L. B. (2004). Operational Hedging: A Review with Discussion.
Chan-Lau, J. A. (2005). Hedging Foreign Exchange Risk in Chile: Markets and Instruments: International Monetary Fund, IMF Working Paper 05/37. DOI: https://doi.org/10.5089/9781451860566.001
Clercq, D. D., Sapienza, H. J., & Crijns, H. (2005). The Internationalization of Small and Medium-Sized Firms. Small Business Economics, 24(4), 409-419. doi: 10.1007/s11187-005-5333-x DOI: https://doi.org/10.1007/s11187-005-5333-x
de la Torre, A., Martínez Pería, M. S., & Schmukler, S. L. (2010). Bank involvement with SMEs: Beyond relationship lending. Journal of Banking & Finance, 34(9), 2280-2293. doi: https://doi.org/10.1016/j.jbankfin.2010.02.014 DOI: https://doi.org/10.1016/j.jbankfin.2010.02.014
Döhring, B. (2008). Hedging and invoicing strategies to reduce exchange rate exposure - a euro-area perspective (Vol. 299): Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
Dominguez, K. M., & Tesar, L. L. (2006). Exchange rate exposure. Journal of International Economics, 68(1), 188-218. DOI: https://doi.org/10.1016/j.jinteco.2005.01.002
Dominguez, N., & Mayrhofer, U. (2017). Internationalization stages of traditional SMEs: Increasing, decreasing and re-increasing commitment to foreign markets. International Business Review, 26(6), 1051-1063. doi: https://doi.org/10.1016/j.ibusrev.2017.03.010 DOI: https://doi.org/10.1016/j.ibusrev.2017.03.010
Dornbusch, R. (1987). Exchange Rates and Prices. The American Economic Review, 77(1), 93-106.
Ehrlich, M., & Anandarajan, A. (2008). Managing financial risk. . Journal of Corporate Accounting and Finance, 19(6), 25-34. DOI: https://doi.org/10.1002/jcaf.20430
Ensari, M. Ş., & Karabay, M. E. (2014). What Helps to Make SMEs Successful in Global Markets? Procedia - Social and Behavioral Sciences, 150, 192-201. doi: https://doi.org/10.1016/j.sbspro.2014.09.030 DOI: https://doi.org/10.1016/j.sbspro.2014.09.030
Fernández, Z., & Nieto, M. J. (2005). Internationalization Strategy of Small and Medium-Sized Family Businesses: Some Influential Factors. Family Business Review, 18(1), 77-89. doi: 10.1111/j.1741-6248.2005.00031.x DOI: https://doi.org/10.1111/j.1741-6248.2005.00031.x
Froot, K. A., & Klemperer, P. D. (1989). Exchange Rate Pass-Through When Market Share Matters. The American Economic Review, 79(4), 637-654.
FROOT, K. A., SCHARFSTEIN, D. S., & STEIN, J. C. (1993). Risk Management: Coordinating Corporate Investment and Financing Policies. The Journal of Finance, 48(5), 1629-1658. doi: https://doi.org/10.1111/j.1540-6261.1993.tb05123.x DOI: https://doi.org/10.1111/j.1540-6261.1993.tb05123.x
Gao, S. S., Sung, M. C., & Zhang, J. (2012). Risk management capability building in SMEs: A social capital perspective. International Small Business Journal, 31(6), 677-700. doi: 10.1177/0266242611431094 DOI: https://doi.org/10.1177/0266242611431094
Garner, C. K., & Shapiro, A. C. (1984). A practical method of assessing foreign exchange rate risk. Midland Corporate Finance Journal, 6-17.
Gimede, V. (2004). Export Propensities and Intensities of Small and Medium Manufacturing Enterprises in South Africa. Small Business Economics, 22(5), 379-389. doi: 10.1023/B:SBEJ.0000022212.08739.54 DOI: https://doi.org/10.1023/B:SBEJ.0000022212.08739.54
Goldberg, P. K., & Knetter, M. M. (1997). Goods Prices and Exchange Rates: What Have We Learned? Journal of Economic Literature, 35(3), 1243-1272. DOI: https://doi.org/10.3386/w5862
Goldberg, S. R., & Drogt, E. L. (2008). Managing Foreign Exchange Risk. Journal of Corporate Accounting & Finance, 19(2), 49-57. doi: https://doi.org/10.1002/jcaf.20373 DOI: https://doi.org/10.1002/jcaf.20373
Graham, J. R., & Rogers, D. A. (2002). Do Firms Hedge in Response to Tax Incentives? The Journal of Finance, 57(2), 815-839. doi: https://doi.org/10.1111/1540-6261.00443 DOI: https://doi.org/10.1111/1540-6261.00443
Hagelin, N. (2003). Why firms hedge with currency derivatives: an examination of transaction and translation exposure. Applied Financial Economics, 13(1), 55-69. doi: 10.1080/09603100110094501 DOI: https://doi.org/10.1080/09603100110094501
Johanson, J., & Vahlne, J.-E. (2009). The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership. Journal of International Business Studies, 40(9), 1411-1431. doi: 10.1057/jibs.2009.24 DOI: https://doi.org/10.1057/jibs.2009.24
Johanson, J., & Vahlne, J. E. (1990). The Mechanism of Internationalisation. International Marketing Review, 7(4). doi: 10.1108/02651339010137414 DOI: https://doi.org/10.1108/02651339010137414
Jonuska, M., & Samenaite, I. E. (2003). Foreign Exchange Risk Management in Lithuanian Companies: The use of currency derivatives: SSE Riga Working Papers. The Stockholm School of Economics in Riga.
Kalinic, I., & Forza, C. (2012). Rapid internationalization of traditional SMEs: Between gradualist models and born globals. International Business Review, 21(4), 694-707. doi: https://doi.org/10.1016/j.ibusrev.2011.08.002 DOI: https://doi.org/10.1016/j.ibusrev.2011.08.002
Kasa, K. (1992). Adjustment costs and pricing-to-market theory and evidence. Journal of International Economics, 32(1), 1-30. doi: https://doi.org/10.1016/0022-1996(92)90034-H DOI: https://doi.org/10.1016/0022-1996(92)90034-H
Katie, R. (2017). 11 Biggest Challenges of International Business in 2017
Krugman, P. (1986). Pricing to Market when the Exchange Rate Changes (Vol. 1926): National Bureau of Economic Research, Inc. DOI: https://doi.org/10.3386/w1926
Kula, V. (2005). Foreign Exchange Exposure Perception and Management of Turkish SMEs. Journal of Small Business & Entrepreneurship, 18(4), 437-452. doi: 10.1080/08276331.2005.10593352 DOI: https://doi.org/10.1080/08276331.2005.10593352
Kunday, Ö., & Şengüler, E. P. (2015). A Study on Factors Affecting the Internationalization Process of Small and Medium Enterprises (SMEs). Procedia - Social and Behavioral Sciences, 195, 972-981. doi: https://doi.org/10.1016/j.sbspro.2015.06.363 DOI: https://doi.org/10.1016/j.sbspro.2015.06.363
Langseth, H., O'Dwyer, M., & Arpa, C. (2016). Forces influencing the speed of internationalisation: An exploratory Norwegian and Irish study. Journal of Small Business and Enterprise Development, 23(1), 122-148. doi: doi:10.1108/JSBED-10-2013-0155 DOI: https://doi.org/10.1108/JSBED-10-2013-0155
Lee, J. (2004). The effects of family ownership and management on firm performance. SAM Advanced Management Journal, 69, 46-52.
Mankiw, N. G. (1985). Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly. The Quarterly Journal of Economics, 100(2), 529-538. DOI: https://doi.org/10.2307/1885395
Marshall, A., Kemmitt, M., & Pinto, H. (2013). The determinants of foreign exchange hedging in Alternative Investment Market firms. The European Journal of Finance, 19(2), 89-111. doi: 10.1080/1351847X.2012.659267 DOI: https://doi.org/10.1080/1351847X.2012.659267
McCarthy, S. (1999). Foreign Exchange Transaction Exposure Management Practices of Australian SMEs: An exploratory analysis. Small Enterprise Research, 7(2), 29-42. doi: 10.5172/ser.7.2.29 DOI: https://doi.org/10.5172/ser.7.2.29
McCarthy, S. (2003). Hedging versus not hedging. Strategies for managing foreign exchange trsansaction exposure: Working Paper 315, Queensland University of Technology, 1-12. https://eprints.qut.edu.au/315/1/WP_McCarthy_Hedging.pdf.
McConaughy, D. L., Walker, M. C., Henderson, G. V., & Mishra, C. S. (1998). Founding family controlled firms: Efficiency and value. Review of Financial Economics, 7(1), 1-19. doi: https://doi.org/10.1016/S1058-3300(99)80142-6 DOI: https://doi.org/10.1016/S1058-3300(99)80142-6
Meissner, H. G., & Gerber, S. (1980). Die Auslandsinvestition als Entscheidungsproblem. Betriebswirtschaftliche Forschung und Praxis : BFuP. - Bochum. Vol. 32 (3), p. 217-228.
Menon, J. (1995). Exchange rate pass-through. Journal of Economic Surveys, 9(2), 197-231. doi: https://doi.org/10.1111/j.1467-6419.1995.tb00114.x DOI: https://doi.org/10.1111/j.1467-6419.1995.tb00114.x
Moen, Ø. (2000). SMEs and International Marketing. Journal of Global Marketing, 13(4), 7-28. doi: 10.1300/J042v13n04_02 DOI: https://doi.org/10.1300/J042v13n04_02
Muller, A., & Verschoor, W. F. C. (2006). Foreign exchange risk exposure: Survey and suggestions. Journal of Multinational Financial Management, 16(4), 385-410. doi: https://doi.org/10.1016/j.mulfin.2005.09.001 DOI: https://doi.org/10.1016/j.mulfin.2005.09.001
OECD. (2004). Promoting Entrepreneurship and innovative SMEs in a global economy. Towards a more responsible and inclusive globalisation: https://www.oecd.org/industry/smes/31919223.pdf.
OECD. (2018). G20/OECD Effective Approaches for Implementing the G20/OECD High-Level Principles on SME Financing http://www.oecd.org/g20/Effective-Approaches-for-Implementing-HL-Principles-on-SME-Financing-OECD.pdf.
Oviatt, B. M., & McDougall, P. P. (1994). Toward a Theory of International New Ventures. Journal of International Business Studies, 25(1), 45-64. DOI: https://doi.org/10.1057/palgrave.jibs.8490193
Oviatt, B. M., & McDougall, P. P. (2005). Defining International Entrepreneurship and Modeling the Speed of Internationalization. Entrepreneurship Theory and Practice, 29(5), 537-553. doi: 10.1111/j.1540-6520.2005.00097.x DOI: https://doi.org/10.1111/j.1540-6520.2005.00097.x
Pennings, J. M. E., & Garcia, P. (2004). Hedging behavior in small and medium-sized enterprises: The role of unobserved heterogeneity. Journal of Banking & Finance, 28(5), 951-978. doi: https://doi.org/10.1016/S0378-4266(03)00046-3 DOI: https://doi.org/10.1016/S0378-4266(03)00046-3
Ruzzier, M., Hisrich Robert, D., & Antoncic, B. (2006). SME internationalization research: past, present, and future. Journal of Small Business and Enterprise Development, 13(4), 476-497. doi: 10.1108/14626000610705705 DOI: https://doi.org/10.1108/14626000610705705
Smith, C. W., & Stulz, R. M. (1985). The Determinants of Firms' Hedging Policies. The Journal of Financial and Quantitative Analysis, 20(4), 391-405. doi: 10.2307/2330757 DOI: https://doi.org/10.2307/2330757
Stiglitz, J. E., & Dixit, A. K. (1977). Monopolistic Competition and Optimum Product Diversity. doi: 10.7916/D8S75S91
Williamson, R. G., Griffin, J. M., & Doidge, C. (2002). Does Exchange Rate Exposure Matter? . Available at SSRN: https://ssrn.com/abstract=313060 or http://dx.doi.org/10.2139/ssrn.313060. DOI: https://doi.org/10.2139/ssrn.313060
Yeo, K. T., & Lai, W. C. (2004). Risk Management Strategies for SME Investing in China: a Singaporean Perspective (pp. 794-798): IEMC2004, International Engineering Management Conference.