Real Options Theory and International Investment Strategy: Past, Present and Future

Edward Elgar Handbook of Research on International Strategic Management, Forthcoming

34 Pages Posted: 30 Apr 2013

See all articles by Jing Li

Jing Li

Simon Fraser University

Yong Li

University of Nevada Las Vegas

Alan M. Rugman

University of Reading

Date Written: April 28, 2013

Abstract

This study reviews the research on international investment strategy from a real options lens and discusses avenues for future research. Uncertainty has been a persistent feature in international business, and multinational enterprises (MNEs) have to deal with uncertainty (e.g., market, political, technological) in strategic decisions concerning foreign market entry mode, scale, and timing. The conventional wisdom in international business (IB) is to view uncertainty as an unfavorable condition that complicates the decision making process and exposes firms to downside risks and losses; as a result, much effort has been put into designing strategies to minimize potential negative outcomes in an uncertain environment. In contrast with the conventional wisdom, real options theory offers a fresh perspective to tackle uncertainty in international investment: Uncertainty in the host market does not necessarily pose a threat to MNEs’ profitability; it may also present valuable opportunities for MNEs to exploit. From this perspective, MNEs should design strategies such that they have the flexibility to benefit from upside potentials while containing downside losses in future. The unique contribution of real options theory is that it provides a general theoretical foundation on which IB scholars can conceptualize how MNEs make investment decisions in an uncertain environment as well as adjust their investment strategies in response to new information in the environment.

Keywords: international business, real options, foreign direct investment, entry mode, uncertainty

Suggested Citation

Li, Jing and Li, Yong and Rugman, Alan M., Real Options Theory and International Investment Strategy: Past, Present and Future (April 28, 2013). Edward Elgar Handbook of Research on International Strategic Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2257508

Jing Li (Contact Author)

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Yong Li

University of Nevada Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

Alan M. Rugman

University of Reading ( email )

Whiteknights
PO Box 217
Reading, Berkshire RG6 6AH
United Kingdom

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