Valuation of the Operating Flexibility of Multinational Corporations


The returns to multinationality are estimated as the value of “operating flexibility.” Empirical measures of the return of multinationality require a precise specification of the extensiveness of the MNC's transnational network to measure the degree of multinationality. This precise, empirically grounded definition of multinationality has been absent from the academic literature to date. We address this omission and we find that two characteristics of the transnational network, its BREADTH (number of foreign countries in which the MNC has operations) and DEPTH (the concentration of foreign subsidiaries in a few countries) are significant in explaining the value of operating flexibility. In particular, we find that the returns to multinationality are maximized for firms with networks that have BREADTH, but not DEPTH. The role of market intangibles such as R&D and advertising on MNC market valuation is shown to depend on the flexibility regime.

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*Linda Allen is a Professor of Finance at Baruch College and the author of Capital Markers and Financial Institutions: A Global View, forthcoming by John Wiley and Sons Inc.

**Christos Pantzalis is an Assistant Professor of Finance at the University of Manitoba. His research interests are in the areas of multinational finance and ownership structure.

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Allen, L., Pantzalis, C. Valuation of the Operating Flexibility of Multinational Corporations. J Int Bus Stud 27, 633–653 (1996).

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