Abstract
This paper compares two real options – within-country growth and across-country operational flexibility – to examine subsidiary expansion/contraction during times of economic crisis. Specifically, we examine how the real options orientations of individual subsidiaries interact with the general characteristics of multinational enterprise networks. Our main findings are that: (a) economic crises can be detrimental for subsidiaries with stronger within-country orientations, and advantageous for those with stronger across-country orientations; and (b) network characteristics are not the sole determinants of subsidiary expansion/contraction – what really matters is how the real options orientations of individual subsidiaries mesh with the overall characteristics of the network they belong to.
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Notes
Some researchers have examined the implications of real options for subsidiary growth and divestment using individual subsidiaries as the unit of analysis (e.g., Belderbos & Zou, 2007, 2009), but their focus has mostly been on environmental factors and not on the real options orientations of individual subsidiaries.
The holder of a put option has the potential (but not the obligation) to sell a particular asset at a given price – known as the exercise or strike price. A call option confers the privilege of purchasing an asset at a specified exercise price.
Our focus is on two sources of uncertainty that reflect economic conditions in a crisis-stricken country: changes in demand (Bell & Campa, 1997; Brouthers, Brouthers, & Werner, 2008; Campa, 1994) and changes in factor prices due to fluctuations in exchange rates and input prices (Kogut & Chang, 1996; Pantzalis et al., 2001; Miller & Reuer, 1998; Rangan, 1998). Both are at the center of the real options literature in MNE contexts.
This sub-additive logic has been studied in the contexts of alliances (Vassolo, Anand, & Folta, 2004), R&D projects (Girotra et al., 2007), and a regional subsidiary network (Belderbos & Zou, 2009).
Since the dependent variable emerges from a change-based measure of subsidiary expansion/contraction, we used the Trend Survey data from 1996 to 2001.
The Trend Survey is conducted under the authority of Article 4 of the Statistical Reports Coordination Act in Japan, therefore the names of the participating corporations and subsidiaries are confidential.
The following variables were included in the first-stage model: country platform subsidiary, export ratio, relative performance, network size, network redundancy, change in institutional environment, parent firm sales, subsidiary sales, parent firm international experience, parent firm local experience, subsidiary age, change in subsidiary export ratio, change in the number of subsidiaries in each host country, change in the number of subsidiaries outside crisis countries, and country dummies.
See Wooldridge (1995) for formal equations and detailed descriptions.
We also operationalized network size by counting the number of subsidiaries under the same parent firm: this alternative option did not affect our results.
We also investigated the percentage change of subsidiary capitalization using the same independent variables of interest. While the directions of the coefficients were generally consistent with those reported here, the results were not statistically significant. We speculate that subsidiary capitalization may not be easily adjusted according to changes in external environments such as economic crises.
We also ran fixed-effects models as a robustness check. Since the fixed-effects model prevents the inclusion of variables that do not vary across time, we could not add the time-invariant indicators for countries, industries, or parent firms to the fixed-effects model. Results for the fixed-effects models were generally consistent with the random-effects results.
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Acknowledgements
The authors are grateful to Department Editor Sea-Jin Chang and three anonymous reviewers for excellent comments and guidance. The authors are also grateful to the Japanese Ministry of Economics, Trade and Industry for data support.
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Accepted by Sea-Jin Chang, Area Editor, 18 June 2009. This paper has been with the authors for four revisions.
APPENDIX
APPENDIX
See Table A1.
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Chung, C., Lee, SH., Beamish, P. et al. Subsidiary expansion/contraction during times of economic crisis. J Int Bus Stud 41, 500–516 (2010). https://doi.org/10.1057/jibs.2009.72
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DOI: https://doi.org/10.1057/jibs.2009.72