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What makes and what does not make a real option? A study of equity shares in international joint ventures

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Author Info

  • Ilya RP Cuypers

    (Lee Kong Chian School of Business, Singapore Management University, Singapore, Singapore)

  • Xavier Martin

    (Department of Organization and Strategy, CentER, Tilburg University, Tilburg, the Netherlands)

Abstract

This paper examines the boundaries of real options logic, with an application to joint ventures (JVs). We distinguish between forms of uncertainty that are resolved endogenously and those that are resolved exogenously, and theorize that only exogenous uncertainty will have the impact predicted by real options theory on a foreign investor's choice of how large an equity share to take in a JV. We theorize that macroeconomic and institutional variables generate exogenous uncertainty whereas, by contrast, cultural distance and choices pertaining to corporate scope and product or process development activities involve endogenous sources of uncertainty that investors can both assess and act upon without having to “wait and see”. Using a sample of 6472 Sino-foreign JVs, we find support for our predictions. We discuss and implement proper methods to test for the existence of null effects, as is relevant to establish the boundaries of a theory such as real options theory. We draw implications for research and practice on JVs – specifically equity share decisions, which deserve more attention – and real options, including suitable uses and desirable extensions of the concept.

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Bibliographic Info

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

Volume (Year): 41 (2010)
Issue (Month): 1 (January)
Pages: 47-69

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Handle: RePEc:pal:jintbs:v:41:y:2010:i:1:p:47-69

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Cited by:
  1. Hoewer, Daniel & Schmidt, Tobias & Sofka, Wolfgang, 2011. "An information economics perspective on main bank relationships and firm R&D," Discussion Paper Series 1: Economic Studies 2011,19, Deutsche Bundesbank, Research Centre.
  2. Martin, Xavier, 2013. "Solving theoretical and empirical conundrums in international strategy research by matching foreign entry mode choices and performance," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5637252, Tilburg University.
  3. Martin, Xavier & Oever, K. van den, 2013. "Progress, maturity or exhaustion? Sources and modes of theorizing on the international strategy - performance relationship (1990-2011)," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5906160, Tilburg University.
  4. Hou, Wanrong & Li, Sali & Priem, Richard L., 2013. "How do CEOs matter? The moderating effects of CEO compensation and tenure on equity ownership in international joint ventures," Journal of International Management, Elsevier, vol. 19(2), pages 138-151.

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