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Real options and the theory of foreign direct investment

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Author Info

  • Li, Jing
  • Rugman, Alan M.

Abstract

We extend applications of real options theory to foreign direct investment (FDI) research regarding choice of location and choice of market entry mode under uncertainty. Our study is motivated by the regional configuration of multinational enterprises (MNEs), as well as observed deviations from the stages model in internationalization theory. We shed light on these issues using real option modeling and computer simulations. The results suggest that from the standpoint of pursuing business opportunities and generating real options, building a subsidiary in a nonhome region could be more beneficial than in a home region. However, high option exercise cost may reduce the option value of a nonhome-region location. Our models also imply that choice of entry mode depends on the magnitude (high vs. low) and the type (exogenous vs. endogenous) of uncertainty. When uncertainty is high and endogenous, MNEs may prefer high-commitment entry modes because they contribute to the reduction of uncertainty and provide valuable growth options.

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Bibliographic Info

Article provided by Elsevier in its journal International Business Review.

Volume (Year): 16 (2007)
Issue (Month): 6 (December)
Pages: 687-712

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Handle: RePEc:eee:iburev:v:16:y:2007:i:6:p:687-712

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Related research

Keywords: FDI theory Market entry mode Option modeling Real options theory Regional location;

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Cited by:
  1. Sala, Davide & Yalcin, Erdal, 2012. "Export experience of managers and the internationalization of firms," Discussion Papers of Business and Economics 18/2012, Department of Business and Economics, University of Southern Denmark.
  2. Davide Sala & Erdal Yalcin, 2012. "Export Experience of Managers and the Internationalization of Firms," Ifo Working Paper Series Ifo Working Paper No. 139, Ifo Institute for Economic Research at the University of Munich.
  3. Ren� Belderbos & Jianglei Zou, 2007. "On the growth of foreign affiliates: multinational plant networks, joint ventures, and flexibility," Journal of International Business Studies, Palgrave Macmillan, vol. 38(7), pages 1095-1112, December.
  4. Kemp-Benedict, Eric, 2012. "The national bioenergy investment model: Technical documentation," MPRA Paper 37835, University Library of Munich, Germany.
  5. Marlene Grande & Aurora A. C. Teixeira, 2011. "Linking entry mode choices of MNCs with countries’ corruption. A review," OBEGEF Working Papers 008, OBEGEF - Observatório de Economia e Gestão de Fraude & OBEGEF Working Papers on Fraud and Corruption.
  6. Belderbos, Rene & Tong, Tony W. & Wu, Shubin, 2012. "Multinationality and downside risk: The contingent roles of option portfolio characteristics and organizational factors," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/355164, Katholieke Universiteit Leuven.
  7. Dinuk Jayasuriya, 2011. "Improvements in the World Bank's Ease of Doing Business Rankings: Do they translate into greater foreign direct investment inflows?," Development Policy Centre Discussion Papers 1108, Development Policy Centre, Crawford School of Public Policy, The Australian National University.
  8. Tony Tong & Jing Li, 2008. "Real options and MNE strategies in Asia Pacific," Asia Pacific Journal of Management, Springer, vol. 25(1), pages 153-169, January.

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