Dynamic Market Entry and the Value of Flexibility in Transitional International Joint Ventures

Posted: 11 Dec 2007  

Elmar Lukas

Otto-von-Guericke University Magdeburg, Faculty of Economics and Management - Chair in Financial Management and Innovation Finance

Abstract

The purpose of this study is to formalize the optimal choice of market entry strategy for an individual multinational enterprise (MNE) from a dynamic perspective. It is argued that incorporating a suitable treatment of irreversibility, uncertainty and flexibility related to an MNE's investment decision gives further insights into the expansion, dissolvement, and optimal timing of international joint ventures (IJVs). In most cases, the initial entry strategy serves as a platform allowing the firm to make subsequent investments to exploit host-country advantages and capabilities. We allow for this by taking a three-step expansion strategy explicitly into account. The evolutionary process of the value of the foreign direct investment can be interpreted as a compound complex chooser option. The results suggest that uncertainty, size of equity share and future investment/divestment opportunities play an important role when it comes to transit from export to the first phase of the foreign direct investment commitment. The paper underscores the importance of modeling the dynamics of market entry and helps to refine the application of real options in the alliance context by providing a closed-form solution in continuous time to value the overall strategic flexibility.

Keywords: foreign direct investment, multinational enterprise, sequential investments, entry mode, international joint venture

JEL Classification: D43, F23, L13, P31

Suggested Citation

Lukas, Elmar, Dynamic Market Entry and the Value of Flexibility in Transitional International Joint Ventures. Review of Financial Economics, Vol. 16, No. 1, 2007. Available at SSRN: https://ssrn.com/abstract=1068125

Elmar Lukas (Contact Author)

Otto-von-Guericke University Magdeburg, Faculty of Economics and Management - Chair in Financial Management and Innovation Finance ( email )

Universitaetsplatz 2
Postfach 4120
Magdeburg, 39106
Germany
+49 391 67 18934 (Phone)
+49 391 67 18007 (Fax)

HOME PAGE: http://www.ifm.ovgu.de

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