Multinationality and downside risk: The roles of option portfolio and organization

Belderbos, René; Tong, Tony W.; Wu, Shubin

doi:10.1002/smj.2087

Cited by 90 publications

(114 citation statements)

References 75 publications

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“…Our theoretical arguments in support of this finding suggest that subsidiaries with diverse investment purposes can benefit from enhanced abilities of adaptability and learning, which are crucial when operating in such dynamic and institutionally less developed locations (Jackson, ; Teece et al ., ). Subsidiaries with less diverse purposes are more susceptible to adverse changes in the environment (Belderbos et al ., ), limiting their ability to redirect focus and remain in operation. However, for subsidiaries with more diverse purposes, it is less likely that an environmental change that affects one of the purposes will also affect the other; hence, in such a situation, these subsidiaries can remain viable by redeploying more of their resources and attention to the purpose that is not adversely hit by the change.…”

Section: Discussionmentioning

confidence: 97%

Foreign Subsidiary Exit from Africa: The Effects of Investment Purpose Diversity and Orientation

Getachew

Beamish

2017

Global Strategy Journal

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Research Summary This study considers the exit likelihood of foreign subsidiaries operating in Africa and identifies strategic orientations that can improve their chances of survival. We find that, on average, subsidiaries entering the African market have a greater exit likelihood than those entering the OECD market. However, those subsidiaries entering the African market with diverse investment purposes or greater market‐seeking orientation are less likely to exit, as they tend to enjoy flexibility, adaptability, and learning advantages useful in mitigating economic challenges and/or tapping into strategic opportunities. Managerial summary This study examines how the decision to enter African markets relates to the exit probability of MNE subsidiaries. Using a longitudinal, paired‐sample design of Japanese foreign subsidiaries operating in Africa and OECD countries, we find that entry to Africa increases the hazard rate of subsidiaries, but that subsidiaries entering with more diverse investment purposes and greater market‐seeking orientation have a better survival likelihood. Consistent with the institutional‐based theory of corporate diversification, our findings introduce purpose diversity and market‐seeking orientation as potential mechanisms to mitigate the hazards of institutional voids/instability. Also, by looking at the phenomenon of within‐subsidiary diversity (of purposes) and its interaction with institutional conditions, we advance the notion of subsidiary scope and its implications. Copyright © 2016 John Wiley & Sons, Ltd.

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Section: Discussionmentioning

confidence: 97%

Foreign Subsidiary Exit from Africa: The Effects of Investment Purpose Diversity and Orientation

Getachew

Beamish

2017

Global Strategy Journal

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“…Fifth, prior research suggests that greenfield ventures and acquisitions may confer different option values (e.g., Brouthers & Dikova, 2010;Smit & Kil, 2017), so we include the variable Acquisition Ratio, measured as the percentage of entries through acquisition in a firm's foreign affiliates. Finally, we control for the value of switching options available from the firm's network of multinational operations (Chang, Kogut, & Yang, 2016;Fisch & Zschoche, 2012;Kogut & Kulatilaka, 1994a;Tong & Reuer, 2007b) by including the variable Switching Flexibility, calculated as one minus the correlation in labor cost across all host countries (e.g., Belderbos, Tong, & Wu, 2014).…”

Section: Control Variablesmentioning

confidence: 99%

Multinational investment and the value of growth options: Alignment of incremental strategy to environmental uncertainty

Belderbos

Tong

2018

Strategic Management Journal

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Research Summary One of the motivations for multinational firms' investment in foreign affiliates in uncertain environments is the future growth opportunities the investment may bring. We argue that whether firms derive growth option value from their multinational investment is determined by the interaction between market uncertainty and firms' incremental investment strategy. We show evidence that multinational investment creates growth option value for firms operating affiliates in host countries with high market uncertainty. In such uncertain environments, however, incremental investment strategies—limiting the equity stake or the size of investment in affiliates, across all countries or within each country—prove critical to the value of growth options. Creating growth option value therefore requires an alignment of firms' incremental investment strategy to the uncertain country environments they confront. Managerial Summary Managers have long recognized the importance of taking an incremental approach to strategy making, but evidence on whether and when strategic incrementalism is valuable to firms remains scarce. This study focuses on two ways Japanese multinational firms invest incrementally in the context of foreign expansion—by limiting the equity stake or the size of investment in their foreign affiliates—and analyzes when such incremental strategies create valuable growth options that translate into market value. We find that these strategies, whether implemented across all host countries or within each country, do create significant growth option value, provided that market uncertainty is high. The findings highlight the importance of aligning firms' incremental strategy to the environmental uncertainties they confront, in line with the core notion of “fit” in strategic management.

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“…Trigeorgis () showed that when real options involve redundancy (e.g., put‐type options such as to contract, switch use, or abandon all paying off in adverse conditions), they may be worth much less than the sum of separate values. In the strategic management literature, Vassolo, Anand, and Folta () examined this idea in the context of biotech alliances, while Belderbos, Tong, and Wu () examined it in the context of multinational investment. Makadok () studied the interaction effects of rivalry restraint and competitive advantage on firm profits and found a strong negative interaction due to a plausible inconsistency to pursue both of these pathways to profit concurrently.…”

Section: Literature and Information Structurementioning

confidence: 99%

Strategic NPV: Real Options and Strategic Games under Different Information Structures

Smit

Trigeorgis

2017

Strategic Management Journal

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Research summary: Among the most difficult firm strategic choices is the trade‐off between making a long‐term commitment or holding off on investment in the face of uncertainty. To operationalize strategic management theory under demand, technological and competitive uncertainty, we develop a Strategic Net Present Value (NPV) framework that integrates real options and game theory to quantify value components and interactions at the interface between NPV, real options, and strategic games. Our approach results in new propositions clarifying the way learning‐experience conditions, technological uncertainty, and proprietary information interact to tilt the balance in the interplay between wait‐and‐see flexibility and strategic commitment. As such, Strategic NPV adds to our understanding of the conditions where NPV, real options, or strategic thinking are more relevant. Managerial summary: This study develops and elucidates implementation of a new valuation construct, “Strategic Net Present Value (NPV),” that integrates real options and game theory to more accurately portray strategic decisions underlying management theory. Among the most difficult firm strategic choices in capital intensive industries, such as energy, mining, chip manufacturing, and infrastructure development, is the trade‐off between making a long‐term commitment or holding off on investment in the face of demand, technological, and competitive uncertainties. The study provides new insights on the way various conditions, such as learning‐experience effects, technological uncertainty, and proprietary information, interact to tilt the balance in the interplay between commitment and wait‐and‐see flexibility. As such, Strategic NPV adds to our understanding of when NPV, real options, or strategic thinking matter more critically for decision making. Copyright © 2017 John Wiley & Sons, Ltd.

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Multinationality and downside risk: The roles of option portfolio and organization

Cited by 90 publications

References 75 publications

Foreign Subsidiary Exit from Africa: The Effects of Investment Purpose Diversity and Orientation

Foreign Subsidiary Exit from Africa: The Effects of Investment Purpose Diversity and Orientation

Multinational investment and the value of growth options: Alignment of incremental strategy to environmental uncertainty

Strategic NPV: Real Options and Strategic Games under Different Information Structures

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