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Real options in multinational corporations: organizational challenges and risk implications

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  • Tony W Tong

    (School of Management, State University of New York at Buffalo, Buffalo, NY, USA)

  • Jeffrey J Reuer

    (Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC, USA)

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    Abstract

    In this study, we investigate how multinationality affects firms’ risk levels. Our investigation builds on the idea from real options theory that international operations offer switching options to multinational corporations, yet we also emphasize different sources of coordination costs that can mitigate the benefits of operational flexibility. The findings from Tobit models accounting for self-selection underscore the importance of unobserved heterogeneity in the relationships between international investments and risk levels. Consistent with the coordination costs surrounding international operations, we find that the relationship between multinationality and downside risk is curvilinear: risk first declines and then increases as a firm's portfolio of international investments becomes extensive. In addition, downside risk is an increasing function of the average cultural distance between a firm's home base and the host countries in which its foreign subsidiaries operate. Journal of International Business Studies (2007) 38, 215–230. doi:10.1057/palgrave.jibs.8400260

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Journal of International Business Studies.

    Volume (Year): 38 (2007)
    Issue (Month): 2 (March)
    Pages: 215-230

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    Handle: RePEc:pal:jintbs:v:38:y:2007:i:2:p:215-230

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    Web page: http://www.palgrave-journals.com/

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    Postal: Palgrave Macmillan Journals, Subscription Department, Houndmills, Basingstoke, Hampshire RG21 6XS, UK
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    Cited by:
    1. Jesús F. Lampón & Pablo Cabanelas-Lorenzo & Santiago Lago-Peñas, 2013. "Why firms relocate their production overseas? The answer lies inside: corporate, logistic and technological determinants," Working Papers 2013/3, Institut d'Economia de Barcelona (IEB).
    2. Tony Tong & Jing Li, 2008. "Real options and MNE strategies in Asia Pacific," Asia Pacific Journal of Management, Springer, Springer, vol. 25(1), pages 153-169, January.
    3. Yu-Fu Chen & Michael Funke, 2011. "Institutional Uncertainty, Economic Integration, and Vertical Foreign Direct Investment Decisions," Open Economies Review, Springer, Springer, vol. 22(4), pages 593-612, September.
    4. Li, Jing & Rugman, Alan M., 2007. "Real options and the theory of foreign direct investment," International Business Review, Elsevier, Elsevier, vol. 16(6), pages 687-712, December.
    5. Elango, B., 2010. "Influence of industry type on the relationship between international operations and risk," Journal of Business Research, Elsevier, Elsevier, vol. 63(3), pages 303-309, March.
    6. Mauri, Alfredo J. & Neiva de Figueiredo, João, 2012. "Strategic Patterns of Internationalization and Performance Variability: Effects of US-Based MNC Cross-Border Dispersion, Integration, and Outsourcing," Journal of International Management, Elsevier, Elsevier, vol. 18(1), pages 38-51.
    7. Fisch, Jan Hendrik & Zschoche, Miriam, 2011. "Do firms benefit from multinationality through production shifting?," Journal of International Management, Elsevier, Elsevier, vol. 17(2), pages 143-149, June.
    8. Dikova, Desislava & Smeets, Roger & Garretsen, Harry & Van Ees, Hans, 2013. "Immediate responses to financial crises: A focus on US MNE subsidiaries," International Business Review, Elsevier, Elsevier, vol. 22(1), pages 202-215.
    9. Driouchi, Tarik & Bennett, David, 2011. "Real options in multinational decision-making: Managerial awareness and risk implications," Journal of World Business, Elsevier, Elsevier, vol. 46(2), pages 205-219, April.
    10. Mauri, Alfredo J. & Lin, Jing & Neiva De Figueiredo, João, 2013. "The influence of strategic patterns of internationalization on the accuracy and bias of earnings forecasts by financial analysts," International Business Review, Elsevier, Elsevier, vol. 22(4), pages 725-735.
    11. Andersen, Torben Juul, 2012. "Multinational risk and performance outcomes: Effects of knowledge intensity and industry context," International Business Review, Elsevier, Elsevier, vol. 21(2), pages 239-252.
    12. Jeffrey J. Reuer & Tony W. Tong, 2007. "Corporate investments and growth options," Managerial and Decision Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 28(8), pages 863-877.

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