Real operating options and foreign direct investment: A synthetic approach

Adrian Buckley and Kalun Tse

European Management Journal, 1996, vol. 14, issue 3, 304-314

Abstract: The ability to change tactical direction in response to new information can contribute significant increments to value. Investments possessing this flexibility have the characteristics of options. Research and development is an obvious example. Oil exploration and mining fall into this category, levels of exploration and investment being highly contingent upon oil prices prevailing. International investment is also an example. Often, it begins with a small commitment which may be scaled upwards or curtailed, depending upon outturns achieved. In this article, the literature on real options is briefly surveyed and an attempt is made, using deductive methods, to develop a model to explain the mode of internationalization by the firm, by incorporating real options concepts as an augmentation to existing foreign direct investment (FDI) theories. Indeed, the theory of FDI produces only partial insights without extending its horizons to embrace ideas based upon net present value inclusive of the promise given by real options.

Date: 1996
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