An investigation of foreign exchange risk management by exporting small and medium sized enterprises

AN INVESTIGATION OF FOREIGN EXCHANGE RISK MANAGEMENT BY EXPORTING SMALL AND MEDIUM SIZED ENTERPRISES by Vu Hung Dang A thesis submitted to Victoria University of Wellington in fulfi

AN INVESTIGATION OF FOREIGN EXCHANGE

RISK MANAGEMENT BY EXPORTING SMALL AND MEDIUM SIZED ENTERPRISES

by

Vu Hung Dang

A thesis submitted to Victoria University of Wellington

in fulfilment of the requirements for the degree of

Doctor of Philosophy

Victoria University of Wellington

2015

i

ABSTRACT

Previous studies on foreign exchange (forex) risk management have tended to focus on multinational enterprises; while how SMEs manage their forex risk is still largely unexplored As small and medium sized enterprises (SMEs) are increasingly involved in international markets, they have become a new research setting on forex risk management Given that SMEs have limited access to resources, skills and capabilities, internal hedging techniques could be favoured by SMEs There is limited research on this matter, and the extant literature on forex management generally considers derivatives as major hedging techniques for large firms This thesis primarily investigates how exporting SMEs manage forex risk In addition, approaches to forex management could be changed as a firm becomes more experienced internationally Following the basic principles of internationalisation theory, the thesis also examines the impact of the internationalisation degree of the firm on forex management decisions

This thesis sheds new light on SMEs’ hedging practices by providing a better understanding of SMEs’ choices of forex risk management Three research questions have been raised: (1) what determinants influence SMEs’ choice to hedge as a way of managing forex risk; (2) what strategies do SMEs use when they choose hedging to manage forex exposure; and (3) how does the degree of internationalisation impact the choice of forex management

The thesis draws on two theoretical perspectives to help address these overarching questions It extends the use of the resource-based view (RBV), and combines this with internationalisation theory The setting of SMEs is a context for using the RBV New Zealand and Australian exporting SMEs provide the sample for testing the hypotheses

The contributions of this thesis are twofold Firstly, the thesis identifies four determinants of forex risk strategy by exporting SMEs, i.e degree of internationalisation (specifically, export ratio), forex exposure, perceived forex risk, and resources Secondly, it extends the use of the RBV and the internationalisation theory in forex risk management of SMEs In addition, the thesis uses a research approach combining an exploratory qualitative study and a main quantitative study