Multinational Investment and Organizational Risk: A Real Options Approach

Jeffrey J. Reuer and Tony W. Tong

Chapter 13 in Creating Value through International Strategy, 2004, pp 165-177 from Palgrave Macmillan

Abstract: Abstract Real options theory ascribes unique advantages to the multinational corporation (MNC). By straddling distinct environments determined by country borders, the MNC is positioned to shift value-chain activities across its network of operations in response to changes in foreign exchange rates, factor and product market conditions and so forth (Kogut 1989; Kogut and Kulatilaka 1994). The basic premise is that the MNC possesses a portfolio of switching options, which are not available to rivals maintaining purely domestic operations. Relative to other perspectives on foreign direct investment (FDI), real options theory therefore highlights several unique advantages that accrue to the firm, including dynamic production efficiencies, downside risk reduction and the ability to seize opportunities that may materialize over time. Many scholars have noted the MNC’s operational flexibility and have pointed out the need to understand better the obstacles to realizing value from multinational operation (for example, Dunning and Rugman 1985; Kogut 1985; Ghoshal 1987; Buckley and Casson 1998).

Keywords: Foreign Direct Investment; Real Option; Switching Option; Strategic Management Journal; Downside Risk (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-00556-3_13

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DOI: 10.1057/9780230005563_13

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