Chapter 7: Real Options in International Business
with Mohamed Azzim Gulamhussen 7.1 INTRODUCTION The study of real options is a relatively new ﬁeld (Campa, 1994; Dixit and Pindyck, 1994). It has important implications for the analysis of business behaviour. It can explain many of the characteristics of real-world decisions which until recently were believed by many people to defy analysis. It can explain the ‘wait and see’ approach to investment, which often seems to indicate procrastination and indecisiveness. In fact, ‘wait and see’ can be an entirely rational risk management strategy. Similarly, it is observed that many managers make only a token commitment of resources at the start of a project. The project has to ‘jump’ a succession of hurdles in order to expand to its full size. This apparently over-cautious ‘bureaucratic’ approach can also be understood as a rational risk management strategy. Not all the behaviour explained by real options is seemingly irrational, however. Real options can also explain sophisticated aspects of behaviour (Schmitzler, 1991). Real options can be used to analyse the pursuit of ﬂexibility in modern international business strategy, as described in Chapter 1 (Kogut and Zander, 1993). Because the ﬁeld of real options research is so new, some important conceptual issues need to be clariﬁed. The term ‘real option’ is not always used in the same way by different writers. It is necessary to clear up some potential confusions when introducing the topic. Real options are non-trivial. Their logic is quite complex. They typically involve situations spanning several time periods, where items...
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