The choice between greenfield investment and cross-border acquisition: A real option approach
AbstractThe purpose of this study is to formalize the choice of market entry strategy for an individual multinational enterprise (MNE) from a dynamic perspective. It is argued that incorporating a suitable treatment of irreversibility, uncertainty and flexibility related to a MNEs investment decision gives further insights to the choice of cross-border acquisitions to greenfield investment as the preferred entry mode. In most cases, the initial entry strategy serves as a platform allowing the firm to make subsequent investments to exploit host-country advantages and capabilities.We allowfor this by taking a two-step expansion strategy explicitly into account. The evolutionary process of the value of the foreign direct investment includes two stochastic elements as well as the timing that triggers the transition from export to foreign direct investment. The results suggest that uncertainty and future investment opportunities play an important role when it comes to transit from export to the first phase of the foreign direct investment commitment as well as have an impact on the choice of entry strategy.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal The Quarterly Review of Economics and Finance.
Volume (Year): 46 (2006)
Issue (Month): 3 (July)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/620167
Other versions of this item:
- Gilroy, Bernard Michael & Lukas, Elmar, 2005. "The Choice between Greenfield Investment and Cross-border Acquisition: A Real Option Approach," MPRA Paper 18819, University Library of Munich, Germany.
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- O32 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Management of Technological Innovation and R&D
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
- Weijian Shan & Jaeyong Song, 1997. "Foreign Direct Investment and the Sourcing of Technological Advantage: Evidence from the Biotechnology Industry," Journal of International Business Studies, Palgrave Macmillan, vol. 28(2), pages 267-284, June.
- Jan Johanson & Jan-Erik Vahlne, 1977. "The Internationalization Process of the Firm—A Model of Knowledge Development and Increasing Foreign Market Commitments," Journal of International Business Studies, Palgrave Macmillan, vol. 8(1), pages 23-32, March.
- Udo Broll & Bernhard Eckwert, 1999. "Exchange Rate Volatility and International Trade," Southern Economic Journal, Southern Economic Association, vol. 66(1), pages 178-185, July.
- Andersson, Thomas & Svensson, Roger, 1994. " Entry Modes for Direct Investment Determined by the Composition of Firm-Specific Skills," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(4), pages 551-60.
- Baldwin, Richard & Krugman, Paul, 1989.
"Persistent Trade Effects of Large Exchange Rate Shocks,"
The Quarterly Journal of Economics,
MIT Press, vol. 104(4), pages 635-54, November.
- Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc.
- Jean-François Hennart & Young-Ryeol Park, 1993.
"Greenfield vs. Acquisition: The Strategy of Japanese Investors in the United States,"
INFORMS, vol. 39(9), pages 1054-1070, September.
- Hennart, J.-F. & Park, Y.R., 1993. "Greenfield vs. Acquisition : the strategy of Japanes investors in the United states," Open Access publications from Tilburg University urn:nbn:nl:ui:12-174430, Tilburg University.
- Bruce Kogut, 1991. "Joint Ventures and the Option to Expand and Acquire," Management Science, INFORMS, vol. 37(1), pages 19-33, January.
- Hirsch, Seev, 1976. "An International Trade and Investment Theory of the Firm," Oxford Economic Papers, Oxford University Press, vol. 28(2), pages 258-70, July.
- Holger Görg, 2000.
"Analysing foreign market entry – The choice between greenfield investment and acquisitions,"
Journal of Economic Studies,
Emerald Group Publishing, vol. 27(3), pages 165-181, September.
- Görg, Holger, 1998. "Analysing Foreign Market Entry: The Choice between Greenfield Investment and Acquisitions," Economics Technical Papers 981, Trinity College Dublin, Department of Economics.
- Pennings, Enrico & Sleuwaegen, Leo, 2000. "The Choice and Timing of Foreign Market Entry under Uncertainty," CEPR Discussion Papers 2470, C.E.P.R. Discussion Papers.
- Pennings, Enrico & Lint, Onno, 2000. "Market entry, phased rollout or abandonment? A real option approach," European Journal of Operational Research, Elsevier, vol. 124(1), pages 125-138, July.
- Buckley, Peter J & Casson, Mark, 1981. "The Optimal Timing of a Foreign Direct Investment," Economic Journal, Royal Economic Society, vol. 91(361), pages 75-87, March.
- Gunther Friedl, 2002. "Sequential Investment And Time To Build," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 54(1), pages 56-79, January.
- Peter J Buckley & Mark C Casson, 1998. "Models of the Multinational Enterprise," Journal of International Business Studies, Palgrave Macmillan, vol. 29(1), pages 21-44, March.
- Dixit, A., 1988.
"Entry And Exit Decisions Under Uncertainty,"
91, Princeton, Department of Economics - Financial Research Center.
- Clark, Ephraim, 1997. "Valuing political risk," Journal of International Money and Finance, Elsevier, vol. 16(3), pages 477-490, June.
- John H Dunning, 1980. "Towards an Eclectic Theory of International Production: Some Empirical Tests," Journal of International Business Studies, Palgrave Macmillan, vol. 11(1), pages 9-31, March.
- Buckley, Adrian & Tse, Kalun, 1996. "Real operating options and foreign direct investment: A synthetic approach," European Management Journal, Elsevier, vol. 14(3), pages 304-314, June.
- McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
- Yigang Pan & David K Tse, 2000. "The Hierarchical Model of Market Entry Modes," Journal of International Business Studies, Palgrave Macmillan, vol. 31(4), pages 535-554, December.
- Lehner, Maria, 2008. "Entry Mode Choice of Multinational Banks," Discussion Papers in Economics 8222, University of Munich, Department of Economics.
- Dailami, Mansoor & Kurlat, Sergio & Lim, Jamus Jerome, 2012.
"Bilateral M&A activity from the global south,"
Policy Research Working Paper Series
5953, The World Bank.
- Dailami, Mansoor & Kurlat, Sergio & Lim, Jamus Jerome, 2012. "Bilateral M&A activity from the Global South," The North American Journal of Economics and Finance, Elsevier, vol. 23(3), pages 345-364.
- Lehner, Maria, 2009. "Entry mode choice of multinational banks," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1781-1792, October.
- Gilroy, Bernard Michael & Lukas, Elmar, 2005.
"Standortoptionen multinationaler Unternehmen: Eine steuerliche Betrachtung
[Location options of multinational enterprises: A fiscal examination]," MPRA Paper 21211, University Library of Munich, Germany.
- Canabal, Anne & White III, George O., 2008. "Entry mode research: Past and future," International Business Review, Elsevier, vol. 17(3), pages 267-284, June.
- Lukas, Elmar, 2013. "Modeling the transitional dynamics of international joint venture policies: An option pricing approach," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 21-36.
- Broll, Udo & Gilroy, B. Michael & Lukas, Elmar, 2008. "Export production under exchange rate uncertainty," Dresden Discussion Paper Series in Economics 08/08, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
- Elmar Lukas, 2005. "Sequential International Joint-Ventures and the Option to Choose," International Finance 0504007, EconWPA, revised 15 Nov 2005.
- Naudé, Wim & Gries, Thomas & Bilkic, Natasa, 2013. "Firm-Level Heterogeneity and the Decision to Export: A Real Option Approach," IZA Discussion Papers 7346, Institute for the Study of Labor (IZA).
- Lukas, Elmar, 2007. "Dynamic market entry and the value of flexibility in transitional international joint ventures," Review of Financial Economics, Elsevier, vol. 16(1), pages 91-110.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.