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CHAPTER FOUR. How Real are Real Options? The Case of International Joint Ventures


Subject Business and Management » Entrepreneurship

DOI: 10.1111/b.9780631235118.2002.00006.x


Extract

Options theory has been employed for some time in many financial and economic applications (e.g., Brennan and Schwartz, 1985 ; Margrabe, 1978 ; McDonald and Siegel, 1986 ; Myers, 1977 ), yet during the last decade or so it has come of its own in the strategy literature. (e.g., Bowman and Hurry, 1993 ; Luehrman, 1998 ; McGrath, 1997, 1999 ; Sanchez, 1993 ). Whereas more familiar financial options provide investors with claims permitting the subsequent purchase or sale of a financial asset, real options instead relate to follow‐on opportunities (i.e., to expand, switch inputs or outputs, stage investment, etc.) created by firms' strategic investments. By emphasizing the dynamic advantages stemming from such flexibility, rather than the static efficiencies described earlier by theories such as transaction cost economics, real options theory has also reoriented scholars' views on the merits of various strategic investments such as foreign direct investment (e.g., Kogut, 1983, 1985 ; Kogut and Chang, 1996 ; Kogut and Kulatilaka, 1994 ). Specifically, the importation of options concepts, both in literal and metaphorical modes, has led to new insights and has presented new avenues for inquiry in the strategy and entrepreneurship fields. Novel aspects of real options treatments include suggestions that through discretionary investments managers can enhance value by embracing, ... log in or subscribe to read full text

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