Switching Options and Coordination Costs in Multinational Firms

42 Pages Posted: 27 Oct 2005

See all articles by Tony W. Tong

Tony W. Tong

University of Colorado at Boulder

Jeffrey J. Reuer

Purdue University - Krannert School of Management

Date Written: October 2005

Abstract

In this study, we investigate how foreign direct investment (FDI) and multinationality affect firms' risk levels. Our investigation builds on the idea from real options theory that international operations offer multinational corporations (MNCs) switching options, yet we also emphasize different sources of coordination costs that can mitigate the benefits of operational flexibility. The findings from Heckman models and Tobit two-stage models with selectivity underscore the importance of unobserved heterogeneity in the relationship between foreign investment and organizational risk. Consistent with the coordination costs surrounding international operations, we find that the relationship between multinationality and downside risk is curvilinear: risk first declines and then increases as a firm's portfolio of international investments becomes extensive. In addition, downside risk is an increasing function of the average cultural distance between a firm's home base and the host countries in which its foreign subsidiaries operate.

Keywords: Real Options, Multinationality, Performance, Downside Risk

Suggested Citation

Tong, Tony W. and Reuer, Jeffrey J., Switching Options and Coordination Costs in Multinational Firms (October 2005). Available at SSRN: https://ssrn.com/abstract=827246 or http://dx.doi.org/10.2139/ssrn.827246

Tony W. Tong (Contact Author)

University of Colorado at Boulder ( email )

UCB 419
Boulder, CO 80309-0419
United States
303-492-8854 (Phone)
303-492-5962 (Fax)

Jeffrey J. Reuer

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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