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Modeling the transitional dynamics of international joint venture policies: An option pricing approach

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  • Lukas, Elmar

Abstract

Real option analysis has been applied to strategies of market entry and global expansion, predominantly in combination with the formation of alliances and joint ventures. Albeit joint venturing based on option pricing theory is studied in both disciplines, financial economics and international business, the link between these strains of literature is not well developed. We use a compound option framework to analyze the impact of decision contingency and learning on formation and duration of joint ventures. Critical thresholds are presented which allow to characterize the conditions under which termination takes place and to estimate the duration of international joint ventures revealing a novel perspective on existing empirical findings. In particular, we find that exchange rate uncertainty and learning have ambiguous effects on investment. While the model also provides a number of new testable predictions the presented closed-form solution can help managers to structure explicit option clauses in JV contracts more efficiently.

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  • 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.
    • Handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:21-36
    DOI: 10.1016/j.iref.2012.08.014
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    1. Bukhvalov, A. & Alekseeva, O., 2016. "International joint venture acquisition by a foreign or local partner," Working Papers 6439, Graduate School of Management, St. Petersburg State University.
    2. Lai, Jung-Ho & Chen, Li-Yu & Chen, Carl R., 2017. "Agency hazard, managerial incentives, and the wealth effects of joint venture investments," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 190-202.

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