The Choice between Greenfield Investment and Cross-Border Acquisition: A Real Option Approach

19 Pages Posted: 19 Sep 2006

See all articles by Elmar Lukas

Elmar Lukas

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

Bernard Michael Gilroy

University of Paderborn - Faculty of Business Administration, Economics and Business Computing

Abstract

The purpose of this study is to formalize the 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 a MNEs investment decision gives further insights to the choice of cross-border acquisitions to greenfield investment as the preferred entry mode. 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 two-step expansion strategy explicitly into account. The evolutionary process of the value of the foreign direct investment includes two stochastic elements as well as the timing that triggers the transition from export to foreign direct investment. The results suggest that uncertainty and future investment opportunities play an important role when it comes to transit from export to the first phase of the foreign direct investment commitment as well as have an impact on the choice of entry strategy.

Keywords: Foreign direct investment, Multinational enterprise, Sequential investments, Entry mode, Greenfield investment, Cross-border acquisition

JEL Classification: D92, F23, G31, O32

Suggested Citation

Lukas, Elmar and Gilroy, Bernard Michael, The Choice between Greenfield Investment and Cross-Border Acquisition: A Real Option Approach. Quarterly Review of Economics and Finance, Vol. 46, No. 3, pp. 447-465, 2006, Available at SSRN: https://ssrn.com/abstract=931347

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

Bernard Michael Gilroy

University of Paderborn - Faculty of Business Administration, Economics and Business Computing ( email )

Warburger Str. 100
D-33098 Paderborn
Germany

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