Equity Commitment under Uncertainty: A Hierarchical Model of Real Option Entry Mode Choices

Forthcoming, International Business Review

41 Pages Posted: 2 Mar 2014 Last revised: 3 Aug 2015

See all articles by Rossitza B. Wooster

Rossitza B. Wooster

Portland State University

Luisa R. Blanco

Pepperdine University School of Public Policy

W. Charles Sawyer

University of Southern Mississippi - College of Business Administration

Date Written: July 25, 2015

Abstract

We develop a hierarchical model of real option entry mode choices under environmental uncertainty and test predictions using a unique sample of U.S. companies expanding in the countries of Latin America and the Caribbean between 1980 and 2005. Our results, based on a probit estimation with sample selection, show that country risk has a significant and negative effect at the primary level of the hierarchy. Sensitivity analysis further distinguishes between which entry modes drive our main results. Taken collectively, our findings suggest that prior acquisition experience, marketing intensity, size, as well as a higher proportion of specific or intangible assets, are key attributes for managers to consider when structuring foreign investments as a portfolio of options. Moreover, we find that international investment experience moderates the extent to which firm capabilities matter by weakening the predicted effects of prior acquisition experience and asset structure when firms make choices regarding equity commitment.

Keywords: Real Options, Entry Mode, Latin America

JEL Classification: F23, N16

Suggested Citation

Wooster, Rossitza B. and Blanco, Luisa R. and Sawyer, W. Charles, Equity Commitment under Uncertainty: A Hierarchical Model of Real Option Entry Mode Choices (July 25, 2015). Forthcoming, International Business Review. Available at SSRN: https://ssrn.com/abstract=2403006 or http://dx.doi.org/10.2139/ssrn.2403006

Rossitza B. Wooster (Contact Author)

Portland State University ( email )

Department of Economics
P.O.Box 751
Portland, OR 97207
United States
503.725.3944 (Phone)
503.725.3945 (Fax)

HOME PAGE: http://web.pdx.edu/~wooster/

Luisa R. Blanco

Pepperdine University School of Public Policy ( email )

24255 Pacific Coast Highway
Malibu, CA 90263
United States

W. Charles Sawyer

University of Southern Mississippi - College of Business Administration ( email )

Hattiesburg, MS 39406
United States
601-266-4489 (Phone)
601-266-4410 (Fax)

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