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The Choice between Greenfield Investment and Cross-border Acquisition: A Real Option Approach

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  • Gilroy, Bernard Michael
  • Lukas, Elmar

Abstract

The purpose of this study is to formalize the choice of market entry strategy for an individual multinational enterprise (MNE) from a dynamic perspective. It is argued that incorporating a suitable treatment of irreversibility, uncertainty and flexibility related to a MNEs investment decision gives further insights to the choice of cross-border acquisitions to greenfield investment as the preferred entry mode. In most cases, the initial entry strategy serves as a platform allowing the firm to make subsequent investments to exploit host-country advantages and capabilities.We allowfor this by taking a two-step expansion strategy explicitly into account. The evolutionary process of the value of the foreign direct investment includes two stochastic elements as well as the timing that triggers the transition from export to foreign direct investment. The results suggest that uncertainty and future investment opportunities play an important role when it comes to transit from export to the first phase of the foreign direct investment commitment as well as have an impact on the choice of entry strategy.

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File URL: http://mpra.ub.uni-muenchen.de/18819/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18819.

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Date of creation: 2005
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Handle: RePEc:pra:mprapa:18819

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Keywords: Foreign direct investment; Multinational enterprise; Sequential investments; Entry mode; Greenfield investment; Cross-border acquisition;

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References

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Citations

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Cited by:
  1. Naudé, Wim & Gries, Thomas & Bilkic, Natasa, 2013. "Firm-Level Heterogeneity and the Decision to Export: A Real Option Approach," IZA Discussion Papers 7346, Institute for the Study of Labor (IZA).
  2. Lukas, Elmar, 2007. "Dynamic market entry and the value of flexibility in transitional international joint ventures," Review of Financial Economics, Elsevier, vol. 16(1), pages 91-110.
  3. Gilroy, Bernard Michael & Lukas, Elmar, 2005. "Standortoptionen multinationaler Unternehmen: Eine steuerliche Betrachtung
    [Location options of multinational enterprises: A fiscal examination]
    ," MPRA Paper 21211, University Library of Munich, Germany.
  4. Dailami, Mansoor & Kurlat, Sergio & Lim, Jamus Jerome, 2012. "Bilateral M&A activity from the global south," Policy Research Working Paper Series 5953, The World Bank.
  5. Lehner, Maria, 2008. "Entry Mode Choice of Multinational Banks," Discussion Papers in Economics 8222, University of Munich, Department of Economics.
  6. Elmar Lukas, 2005. "Sequential International Joint-Ventures and the Option to Choose," International Finance 0504007, EconWPA, revised 15 Nov 2005.
  7. Lukas, Elmar, 2013. "Modeling the transitional dynamics of international joint venture policies: An option pricing approach," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 21-36.
  8. Canabal, Anne & White III, George O., 2008. "Entry mode research: Past and future," International Business Review, Elsevier, vol. 17(3), pages 267-284, June.
  9. Broll, Udo & Gilroy, B. Michael & Lukas, Elmar, 2008. "Export production under exchange rate uncertainty," Dresden Discussion Paper Series in Economics 08/08, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  10. Lehner, Maria, 2009. "Entry mode choice of multinational banks," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1781-1792, October.

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