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Joint venture evolution: extending the real options approach

Author

Listed:
  • Jing Li

    (Faculty of Business Administration, Simon Fraser University, Burnaby, BC, Canada)

  • Charles Dhanaraj

    (Kelley School of Business, Indiana University, Indianapolis, IN, USA)

  • Richard L. Shockley

    (Kelley School of Business, Indiana University, Bloomington, IN, USA)

Abstract

Real options theory has emerged as a promising avenue to study joint venture (JV) evolution as a strategic response to managing uncertainty. We extend the real options approach by integrating it with game theory. Such a combined method enriches the valuation functions of each partnering firm and helps to identify the optimal decisions for exercising options in a JV. In our model, each firm's synergy from the joint operation and its knowledge acquisition capability (KAC) can significantly influence the competitive dynamics between partners, potentially affecting how each firm decides to acquire, divest, or dissolve. We employ a new solution technique in real options theory to capture the stochastic process of three factors, and use computer simulation to test the model under varying conditions. The results are stated in five testable propositions, providing a better understanding of the dynamics of a JV. We find that symmetries between partners in synergy or KAC contribute to stability or dissolution of the JV, whereas asymmetries in synergy or KAC make acquisition of the JV assets by one partner desirable. Copyright © 2008 John Wiley & Sons, Ltd.

Suggested Citation

  • Jing Li & Charles Dhanaraj & Richard L. Shockley, 2008. "Joint venture evolution: extending the real options approach," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(4), pages 317-336.
    • Handle: RePEc:wly:mgtdec:v:29:y:2008:i:4:p:317-336
    DOI: 10.1002/mde.1407
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    References listed on IDEAS

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    Cited by:

    1. Andrejs Čirjevskis, 2020. "Valuing Reciprocal Synergies in Merger and Acquisition Deals Using the Real Option Analysis," Administrative Sciences, MDPI, vol. 10(2), pages 1-25, April.
    2. Li, Jing & Rugman, Alan M., 2007. "Real options and the theory of foreign direct investment," International Business Review, Elsevier, vol. 16(6), pages 687-712, December.
    3. Tailan Chi & Jing Li & Lenos G Trigeorgis & Andrianos E Tsekrekos, 2019. "Real options theory in international business," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(4), pages 525-553, June.
    4. Dimitrios Zormpas, 2017. "How vertical relationships and external funding affect investment efficiency and timing?," 2017 Papers pzo81, Job Market Papers.
    5. Dimitrios Zormpas, 2021. "Jointly Held Investment Options and Vertical Relationships," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 58(4), pages 513-530, June.

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