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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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Author Info
Jan Hendrik Fisch () (University of Augsburg, Department of Economics)
Abstract

This paper develops a real options model to explain the decision of enlarging a new foreign subsidiary by subsequent investment. The model is tested by a panel of 1148 subsidiaries in 22 host countries. The findings complement the traditional 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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File URL: http://www.wiwi.uni-augsburg.de/globalbusinessmanagement/Diskussionspapiere/GBM_Paper_0801_Jan_Fisch.pdf
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Paper provided by University of Augsburg, competence center for global business management in its series Diskussionsreihe "Global Business Management" with number 2.

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Length: 33 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:auh:wpaper:0002

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Web page: http://www.wiwi.uni-augsburg.de/globalbusinessmanagement/
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Related research
Keywords: real options; internationalization; uncertainty; investment strategy;

Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
M16 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - International Business Administration

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References listed on IDEAS
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.:
  1. Yadong Luo, 1999. "Time-based Experience and International Expansion: The Case of an Emerging Economy," Journal of Management Studies, Blackwell Publishing, vol. 36(4), pages 505-534, 07. [Downloadable!] (restricted)
  2. Gatignon, Hubert & Anderson, Erin, 1988. "The Multinational Corporation's Degree of Control over Foreign Subsidiaries: An Empirical Test of a Transaction Cost Explanation," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(2), pages 305-36, Fall.
  3. Benito, Gabriel R G, 1997. "Divestment of Foreign Production Operations," Applied Economics, Taylor and Francis Journals, vol. 29(10), pages 1365-77, October. [Downloadable!] (restricted)
    Other versions:
  4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  5. Panayi, Sylvia & Trigeorgis, Lenos, 1998. "Multi-stage Real Options: The Cases of Information Technology Infrastructure and International Bank Expansion," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 675-692. [Downloadable!] (restricted)
  6. Bloom, Nicholas & Bond, Stephen Roy & Van Reenen, John, 2003. "Uncertainty and Company Investment Dynamics: Empirical Evidence for UK Firms," CEPR Discussion Papers 4025, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Ulf von Kalckreuth, 2003. "Exploring the role of uncertainty for corporate investment decisions in Germany," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(II), pages 173-206, June. [Downloadable!]
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  8. Cherian, Joseph A. & Perotti, Enrico, 2001. "Option pricing and foreign investment under political risk," Journal of International Economics, Elsevier, vol. 55(2), pages 359-377, December. [Downloadable!] (restricted)
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  9. A. Steven Holland & Steven H. Ott & Timothy J. Riddiough, 2000. "The Role of Uncertainty in Investment: An Examination of Competing Investment Models Using Commercial Real Estate Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(1), pages 33-64. [Downloadable!] (restricted)
  10. Miller, K.D., 1993. "Industry and Country Effects on Manager's Perceptions of Environmental Uncertainties," Papers 93-105, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
  11. John Dunning, 1981. "Explaining the international direct investment position of countries: Towards a dynamic or developmental approach," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 117(1), pages 30-64, March. [Downloadable!] (restricted)
  12. Folta, Timothy B. & Johnson, Douglas R. & O'Brien, Jonathan, 2006. "Uncertainty, irreversibility, and the likelihood of entry: An empirical assessment of the option to defer," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 432-452, November. [Downloadable!] (restricted)
  13. Enders, Walter & Sandler, Todd, 1996. "Terrorism and Foreign Direct Investment in Spain and Greece," Kyklos, Blackwell Publishing, vol. 49(3), pages 331-52.
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