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
Date Written: July 25, 2015
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: Suggested Citation