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

Smit, Han; Trigeorgis, Lenos

doi:10.1002/smj.2665

Cited by 31 publications

(34 citation statements)

References 72 publications

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“…The paper has a number of limitations. The model is very simple and hence abstracts from several important factors such as multiple periods, switching costs, and the e↵ects of competition on technology choice (Bollen, 1999;Smit & Trigeorgis, 2017;Kulatilaka, 1988). The simplicity of the model, however, allows us to transparently illustrate the key relationships investigated in the data.…”

Section: Discussionmentioning

confidence: 99%

Flexible Production and Entry: Institutional, Technological, and Organizational Determinants

2019

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Academics, the media, and policymakers have all raised concerns about the implications of human workers being replaced by machines or software. Few have discussed the implications of the reverse: firms' ability to replace capital with workers. We show that this flexibility can help new firms overcome uncertainty and increase entrepreneurial entry. We develop a simple real options model where permissive labor regulations allow firms to take advantage of capital-labor substitutability by replacing 'rigid' capital with 'flexible' labor. The model highlights institutional, technological, and organizational preconditions to using this flexibility. Using a large and comprehensive dataset on entry by standalone firms and group a liates, we provide evidence in support of the model.

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Section: Discussionmentioning

confidence: 99%

Flexible Production and Entry: Institutional, Technological, and Organizational Determinants

2019

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“…Our study complements prior real options research that takes a decision‐theoretic approach to examine how firms' investment behavior or decision pattern is driven by uncertainty through its effects on the value of the embedded options in investments (e.g., Folta & Miller, ; Folta & O'Brien, ; Kogut, ; Kogut & Chang, ; Li & Li, ; Xu, Zhou, & Phan, ). In addition, our study provides a bridge between this stream of research with the (finance) literature that focuses on the valuation of real options (e.g., Smit & Trigeorgis, ), by linking the value of growth options to firms' investment strategies and the uncertainties surrounding their investments. Our study also joins recent work on the valuation effects of firms' investments with option‐like features, including R&D capital (Oriani & Sobrero, ; Reuer & Tong, ), technology development (Levitas & Chi, ), and joint ventures (Kumar, ; Tong et al, ), and we contribute a contingency framework to improve existing knowledge of the conditions under which firms obtain growth option value from their investments.…”

Section: Discussionmentioning

confidence: 99%

“…We show that the creation of growth option value from multinational investment under uncertainty depends crucially on the use of incremental strategies and whether such strategies are aligned with uncertainty conditions present in the host countries in which firms operate affiliates, pointing to important boundary conditions for the relationship between multinationality and firms' value of growth options. In addition, our study connects prior (finance) research on valuations of real options (Berk, Green, & Naik, ; Brealey & Myers, ) with real options research on investment decisions (Dixit & Pindyck, ; Smit & Trigeorgis, , ; Trigeorgis, ), by relating firms' value of growth options to their investment strategies as well as the uncertainty surrounding their investments. Finally, going beyond the contributions to the real options literature, our research adds to a large body of research on the multinationality and performance relationship (e.g., Goerzen & Beamish, ; Hitt, Hoskisson, & Kim, ; Lu & Beamish, ; Qian, Khoury, Peng, & Qian, ), by responding to calls to analyze factors, including characteristics of foreign affiliates and conditions in host countries, that may moderate the effect of multinationality on performance (e.g., Hennart, , ; Wiersema & Bowen, ).…”

Section: Introductionmentioning

confidence: 99%

“…Whereas research based on this approach has significantly increased our understanding of firms' investment under uncertainty, considerably less work has examined whether and when undertaking investments with embedded growth options contributes to firms' valuation or performance outcomes (Li, James, Madhavan, & Mahoney, 2007;Tong & Reuer, 2007a). While prior studies have examined the growth options embedded in joint ventures (Tong et al, 2008), advancing our understanding of how firms may create growth option value from their investments requires a framework integrating the roles of firm (investment) heterogeneity and uncertainty, which are core concepts in strategic management and real options research, respectively (Smit & Trigeorgis, 2017;Trigeorgis & Reuer, 2017).…”

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confidence: 99%

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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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“…Another concern expressed in earlier reviews/critiques has to do with the role of managerial cognition, firm capabilities, and how attitudes and biases might impact real option decisions (Smit and Trigeorgis, 2017). With only one exception (Miller and Shapira, 2004), none of the empirical studies we reviewed addresses these important issues.…”

Section: Individual Performancementioning

confidence: 99%

25 Years of Real Option Empirical Research in Management

Ipsmiller

Brouthers

Dikova

2018

European Management Review

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For several decades, management scholars have extolled the virtues of using real option logic when making decisions under uncertainty. Real option logic suggests that in such situations, firms might be better off deferring or staging investments, reducing potential financial losses, while at the same time securing an option to grow (or abandon) the investment when uncertainty abates. Our analysis of the empirical research published in leading management journals over the past 25 years suggests that while some progress has been made, much more work needs to be done. We still do not have the answers to critical questions such as: Which entrepreneurial/managerial traits impact the identification or exploitation of real options? Do multiple types of uncertainties interact with each other and influence real option decisions? Addressing these and other issues identified in our study can help improve our understanding of the usefulness of real option logic in management.

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

Cited by 31 publications

References 72 publications

Flexible Production and Entry: Institutional, Technological, and Organizational Determinants

Flexible Production and Entry: Institutional, Technological, and Organizational Determinants

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

25 Years of Real Option Empirical Research in Management

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