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Chapter 18: Real options theory and international investment strategy: past, present and future
Jing Li, Yong Li and Alan M. Rugman
Uncertainty has been a persistent feature in international business, and multinational enterprises (MNEs) are required to deal with uncertainty (e.g. market, political, technological) in various strategic decisions concerning foreign market entry mode, scale and timing (Buckley and Casson, 1998). The conventional wisdom in international business (IB) is to view uncertainty as an unfavorable condition that complicates the decision-making process and exposes firms to downside risks and losses; as a result, much effort has been put into designing strategies to minimize potential negative outcomes in an uncertain environment (Buckley and Casson, 1976; Rugman, 1981). In contrast with the conventional wisdom, real options theory offers a fresh perspective to tackle uncertainty in international investment: uncertainty in the host market does not necessarily pose a threat to MNEs’ profitability; it may also present valuable opportunities for MNEs to exploit (Dixit and Pindyck, 1994; Trigeorgis, 1996). From this perspective, MNEs should design strategies such that they have the flexibility to benefit from upside potentials while containing downside losses in future (Buckley and Casson, 1998; Chi and Seth, 2009). The unique contribution of real options theory is that it provides a general theoretical foundation on which IB scholars can conceptualize how MNEs make investment decisions in an uncertain environment as well as adjust their investment strategies in response to new information in the environment (Belderbos and Zou, 2007, 2009; Li and Li, 2010; Tong et al., 2008).
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