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Real call options to enlarge foreign subsidiaries - The moderating effect of irreversibility on the influence of economic volatility and political instability on subsequent FDI

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  • Jan Hendrik, Fisch
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    Abstract

    This paper develops a real option model to explain the decision of enlarging a new foreign subsidiary by subsequent investment. The model is tested on a panel of 1148 subsidiaries in 22 host countries. The findings complement the traditional process model of firm internationalization. Rather than abiding by an incremental pattern of investment, internationalizing firms seem to keep foreign investment strategies flexible and build up their subsidiaries contingent upon the interaction of economic volatility and irreversibility of investment. However, the moderating effect of irreversibility on the relationship between uncertainty and investment may not hold for downside risks such as political instability.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of World Business.

    Volume (Year): 46 (2011)
    Issue (Month): 4 (October)
    Pages: 517-526

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    Handle: RePEc:eee:worbus:v:46:y:2011:i:4:p:517-526

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    Related research

    Keywords: Foreign direct investment Real options Investment under uncertainty Irreversible investment Post-entry Phase Subsidiary development;

    References

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