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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 653343, KU Leuven, Faculty of Economics and Business (FEB), Department of Management, Strategy and Innovation, Leuven.
    • Handle: RePEc:ete:msiper:653343
    Note: paper number MSI_2005
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