Multinational Real Options and Hysteresis: An Examination of FDI in Manufacturing and Hard- and Soft-Service Industries

H. Young Baek, David Cho and Dong-Kyoon Kim

Emerging Markets Finance and Trade, 2012, vol. 48, issue 0, 7-19

Abstract: Growth option benefits in foreign direct investment may be limited by a low probability of exercise due to less demand or corporate focus change. Acquisitions driven by management self-interest may even decrease shareholder wealth. Flexibility option benefits are negligible among soft-service multinational enterprises (MNEs), but are better realized by hard-service MNEs, which are operationally less encumbered by hysteresis than manufacturing MNEs. For 235 foreign acquisitions announced by U.S. firms during 1999 and 2000, flexibility options have a positive effect on shareholder value especially for the hard-service acquirers, which are less subject to the muting effects of hysteresis.

Keywords: flexibility; foreign direct investment (FDI); growth; hysteresis; multinational enterprise (MNE); real option; platform; switching (search for similar items in EconPapers)
Date: 2012
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