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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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Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 46 (2006)
Issue (Month): 3 (July)
Pages: 447-465

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Handle: RePEc:eee:quaeco:v:46:y:2006:i:3:p:447-465
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620167

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Find related papers by JEL classification:
  • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
  • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
  • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
  • D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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Cited by:

  1. Lehner, Maria, 2009. "Entry mode choice of multinational banks," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1781-1792, October.
  2. Canabal, Anne & White III, George O., 2008. "Entry mode research: Past and future," International Business Review, Elsevier, vol. 17(3), pages 267-284, June.
  3. 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.
  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. Elmar Lukas, 2005. "Sequential International Joint-Ventures and the Option to Choose," International Finance 0504007, EconWPA, revised 15 Nov 2005.
  6. 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.
  7. 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.
  8. Lehner, Maria, 2008. "Entry Mode Choice of Multinational Banks," Discussion Papers in Economics 8222, University of Munich, Department of Economics.
  9. Reddy, Kotapati Srinivasa, 2015. "Determinants of Cross-border Mergers and Acquisitions: A Comprehensive Review and Future Direction," MPRA Paper 63969, University Library of Munich, Germany, revised 2015.
  10. 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.
  11. 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).

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