A multifactor model for international plant location and financing under uncertainty

Abstract

This paper presents a model for analyzing international plant location and financing decisions under uncertainty. The model diverges from the usual plant location problem in that location and financing decisions are considered simultaneously. This approach is necessary since subsidized financing as well as preferential tax treatment can be significant influences on international location decisions. In addition, financing in different currencies can be used to hedge uncertain price and exchange rate movements. Risk aversion enters via a mean-variance objective function in firm profit. The resulting problem is mixedinteger quadratic and would generally present severe computational difficulties. However, we show that a multifactor approach can be used to transform this problem into one which can be solved fairly readily. The result is a model which is computationally feasible for problems of reasonable size while still including the effects of uncertainty, financial subsidies and hedging strategies on international location decisions. Computational experience is discussed for two solution procedures. One approach uses the quadratic programming package of LINDO coupled to a branch-and-bound procedure. The other approach used a gradient search procedure plus branch-and-bound.

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