Sequential International Joint-Ventures and the Option to Choose

Elmar Lukas

International Finance from EconWPA

Abstract: The purpose of this study is to formalize the optimal 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 expansion, dissolvement, and optimal timing of international joint ventures (IJVs). The evolutionary process of the value of the foreign direct investment can be interpreted as a compound complex chooser option. The results suggest that uncertainty, size of equity share and future investment/divestment opportunities play an important role when it comes to transit from export to the first phase of the foreign direct investment commitment. The paper underscores the importance of modeling the dynamics of market entry and helps to refine the application of real options in the alliance context by providing a closed-form solution in continuous time to value

Keywords: Foreign direct investment; multinational enterprise; sequential investments; entry mode; international joint venture; real options (search for similar items in EconPapers)
JEL-codes: D43 F23 L13 P31 (search for similar items in EconPapers)
Date: 2005-04-21, Revised 2005-11-15
Note: Type of Document - pdf; pages: 36
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpif:0504007

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