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Portfolio configuration and foreign entry decisions: A juxtaposition of real options and risk diversification theories

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  • Rene Belderbos
  • Tony W Tong
  • Shubin Wu

Abstract

Research Summary: Research on foreign market entry has rarely considered that multinational firms’ new entries may be affected by the configuration of their existing affiliates. We argue that in making entry decisions, firms take into account how an entry into a new location helps increase the operational flexibility of their affiliate portfolios due to options to switch operations across affiliates in case of diverging labor cost developments across host countries. We juxtapose this real options based explanation with a risk diversification explanation. Analysis of Japanese multinational firms’ foreign entry decisions suggests that the two explanations are complementary. We also establish portfolio-level boundary conditions to the influence of operational flexibility considerations on entry, in the form of product diversification and the nature of dispersion of labor cost levels.

Suggested Citation

  • Rene Belderbos & Tony W Tong & Shubin Wu, 2020. "Portfolio configuration and foreign entry decisions: A juxtaposition of real options and risk diversification theories," Working Papers of Department of Management, Strategy and Innovation, Leuven 648438, KU Leuven, Faculty of Economics and Business (FEB), Department of Management, Strategy and Innovation, Leuven.
    • Handle: RePEc:ete:msiper:648438
    Note: paper number MSI_2001
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    Cited by:

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    4. Daitian Li & Tony W Tong & Yangao Xiao & Feida Zhang, 2022. "Terrorism-induced uncertainty and firm R&D investment: A real options view," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 53(2), pages 255-267, March.
    5. Onali, Enrico & Mascia, Danilo V., 2022. "Corporate diversification and stock risk: Evidence from a global shock," Journal of Corporate Finance, Elsevier, vol. 72(C).
    6. Song, Sangcheol, 2021. "When do multinational corporations adjust production volume flexibly among in-network subsidiaries?," Journal of Business Research, Elsevier, vol. 135(C), pages 532-542.
    7. Song, Sangcheol, 2022. "Cultural diversification, human resource-based coordination, and downside risks of multinationality," Journal of Business Research, Elsevier, vol. 142(C), pages 562-571.
    8. Gänser-Stickler, Gertraud M. & Schulz, Matthias & Schwens, Christian, 2022. "Sitting on the fence - Untangling the role of uncertainty in entrepreneurship and paid employment for hybrid entry," Journal of Business Venturing, Elsevier, vol. 37(2).
    9. Jong Min Lee, 2022. "MNCs as dispersed structures of power: Performance and management implications of power distribution in the subsidiary portfolio," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 53(1), pages 126-155, February.
    10. Sophocles P. Ioulianou & Michael J. Leiblein & Lenos Trigeorgis, 2021. "Multinationality, portfolio diversification, and asymmetric MNE performance: The moderating role of real options awareness," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 52(3), pages 388-408, April.
    11. Song, Sangcheol, 2022. "Determining investment size and local embeddedness under host market uncertainty and growth rates," International Business Review, Elsevier, vol. 31(2).
    12. Song, Sangcheol, 2023. "Portfolio ownership, production shifts, and downside risks: Evidence from Korea," Journal of Business Research, Elsevier, vol. 155(PA).
    13. Wei Wang & Kimberly A. Eddleston & Francesco Chirico & Stephen X. Zhang & Qiaozhuan Liang & Wei Deng, 2023. "Family Diversity and Business Start-Up: Do Family Meals Feed the Fire of Entrepreneurship?," Entrepreneurship Theory and Practice, , vol. 47(4), pages 1265-1297, July.
    14. Luiz, John M. & Barnard, Helena, 2022. "Home country (in)stability and the locational portfolio construction of emerging market multinational enterprises," Journal of Business Research, Elsevier, vol. 151(C), pages 17-32.

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    Keywords

    Market entry; multinational firm; real options; flexibility; risk diversification; portfolio;
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