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Real options in multinational corporations: organizational challenges and risk implications

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Abstract

In this study, we investigate how multinationality affects firms’ risk levels. Our investigation builds on the idea from real options theory that international operations offer switching options to multinational corporations, yet we also emphasize different sources of coordination costs that can mitigate the benefits of operational flexibility. The findings from Tobit models accounting for self-selection underscore the importance of unobserved heterogeneity in the relationships between international investments and risk levels. Consistent with the coordination costs surrounding international operations, we find that the relationship between multinationality and downside risk is curvilinear: risk first declines and then increases as a firm's portfolio of international investments becomes extensive. In addition, downside risk is an increasing function of the average cultural distance between a firm's home base and the host countries in which its foreign subsidiaries operate.

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Notes

  1. Some prior studies also emphasized the important role of marketing intangibles in stimulating FDI (e.g., Morck and Yeung, 1991). In our paper, advertising intensity was not used because of substantial missing data for this variable in Compustat (i.e., 66% of the firms).

  2. We thank an anonymous reviewer for this suggestion.

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Acknowledgements

In developing this research, we have benefited from discussions with Bruce Kogut, Michael Leiblein, Kent Miller, and Subi Rangan. We also appreciate the useful comments we received from J. Myles Shaver and three anonymous reviewers. An earlier version of this paper was presented at the Fourth Annual International Business Research Forum at Temple University, and participants offered helpful comments. We thank Kyung Min Park for assistance with data collection. We appreciate research funding from the Faculty Small Grant Program at the State University of New York at Buffalo, and from the Center for International Business Education and Research (CIBER), the Wahlen Case Development and Research Fund, and the Jefferson-Pilot Faculty Development Fund at the Kenan-Flagler Business School at the University of North Carolina.

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  1. School of Management, State University of New York at Buffalo, Buffalo, NY, USA

    Tony W Tong

  2. Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC, USA

    Jeffrey J Reuer

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  1. Tony W Tong
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Correspondence to Jeffrey J Reuer.

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Accepted by J. Myles Shaver, Departmental Editor, 11 June 2006. This paper has been with the authors for two revisions.

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Tong, T., Reuer, J. Real options in multinational corporations: organizational challenges and risk implications. J Int Bus Stud 38, 215–230 (2007). https://doi.org/10.1057/palgrave.jibs.8400260

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