Real options theory in international business

Chi, Tailan; Jing, Li; Trigeorgis, Lenos; Tsekrekos, Andrianos Ε.

doi:10.1057/s41267-019-00222-y

Cited by 84 publications

(53 citation statements)

References 141 publications

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“…Third, we also find that labor cost volatility in the host country increases the likelihood of entry, as such volatility uniformly increases switching opportunities. Overall, our study responds to calls to contribute to real options research by focusing on how an individual investment decision may be shaped by related investments in the portfolio (Chi et al, 2019; Tong & Reuer, 2007b; Trigeorgis & Reuer, 2017).…”

Section: Discussionmentioning

confidence: 79%

“…In this paper, we draw on real options theory of multinational investment and argue that firms' new entries depend on characteristics of the configuration of their existing affiliate portfolios. Multinational firms take into account the contribution that an entry into a new location makes toward increasing the operational flexibility of their manufacturing affiliate portfolios, which represents a unique advantage of multinationality compared to purely domestic operations (Chi, Li, Trigeorgis, & Tsekrekos, 2019; de Meza & van der Ploeg, 1987; Kogut, 1985, 1989). In the parlance of real options, such increase in operational flexibility derives from the enhanced options to switch value‐added activities across internationally dispersed affiliates in case of diverging developments in labor and other input cost (Kogut & Kulatilaka, 1994).…”

Section: Introductionmentioning

confidence: 99%

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Portfolio configuration and foreign entry decisions: A juxtaposition of real options and risk diversification theories

Belderbos

Tong

2020

Strategic Management Journal

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Section: Discussionmentioning

confidence: 79%

Section: Introductionmentioning

confidence: 99%

Portfolio configuration and foreign entry decisions: A juxtaposition of real options and risk diversification theories

Belderbos

Tong

2020

Strategic Management Journal

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“…In addition, multinational firms often need to confront high levels of uncertainty in their international operations, thus a focus on real options theory is fitting given the theory's emphasis on the role of uncertainty in shaping firms' investment behavior. While the particular characteristics of foreign expansion by multinational firms render applications of real options theory promising, leading to a growing literature in the international strategy domain (Chi, Li, Trigeorgis, & Tsekrekos, 2018), the question of when firms can reap growth option value from their foreign investment portfolio has not received much attention.…”

Section: Introductionmentioning

confidence: 99%

“…In this regard, Cuypers and Martin () find evidence that multinational firms' choice of equity shares in international joint ventures is affected by market uncertainty but not by uncertainty related to cultural distance and partner trust, which firms could address through appropriate partner choice and human resource strategies. We note, however, that whether and when endogenous uncertainty can be considered a source of option value is subject to some debate (Chi et al, 2018). …”

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confidence: 96%

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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“…The most effective way to address this uncertainty is to have more flexible decision-making rights and selectively exercise these rights according to the changing situation. The real option theory is a powerful tool for resolving the uncertainty in investment decisions and is widely applied to IB and company strategy in the presence of uncertainty [28], playing a significant role in the research on investment decisions in the international context. Most investment problems involve the irreversibility, flexibility and the uncertain factors over the future profits from the investment and other variables, which are regarded as the essential characteristics of real options problems and significantly impact the optimal investment decisions.…”

Section: Literature Reviewmentioning

confidence: 99%

The Optimal Decisions for Formation International Joint Ventures under Uncertainty

Zhang

2020

IEEE Access

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This paper develops a model in which the two parties to an international joint venture (IJV) determine the optimal cost ratio and profit share and exercise the jointly held option to enter into an IJV in uncertain situations. In our setting, the two partners make their decisions sequentially under a two-stage Stackelberg game framework, where the risk-neutral multinational company as the leader first designs the cost and equity allocation, and then the risk-averse local firm follows by choosing the optimal timing at which to exercise the joint venture option. The Stackelberg equilibrium solutions to the model are obtained by using a mix of game theory and real options. The results of the numerical analysis show that despite the multinational company's dominant position in the IJV, its equity share is not always higher than that of the local company and is closely related to the expected growth rate, risk aversion level and market volatility. The cost ratio of the foreign partner will increase correspondingly with its equity ratio unless it faces much more uncertainty in the environment. In addition, an increase in risk aversion leads to the local company sharing a higher proportion of the equity and costs of the joint venture partnership. The findings of the study can provide scientific guidance and suggestions on the transnational joint venture for overseas investment, especially in the ''One Belt and One Road'' initiative.

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Real options theory in international business

Cited by 84 publications

References 141 publications

Portfolio configuration and foreign entry decisions: A juxtaposition of real options and risk diversification theories

Portfolio configuration and foreign entry decisions: A juxtaposition of real options and risk diversification theories

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

The Optimal Decisions for Formation International Joint Ventures under Uncertainty

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