Title

What Makes and What Does Not Make a Real Option? A Study of International Joint Ventures

Publication Type

Conference Proceeding Article

Publication Date

2006

Abstract

This paper examines the boundaries of real options logic, with an application to joint ventures (JVs). We distinguish between forms of uncertainty that are resolved endogenously and those that are resolved exogenously, and theorize that only exogenous uncertainty will have the impact predicted by real options theory on a foreign investor's choice of how large an equity share to take in a JV. We theorize that macroeconomic and institutional variables generate exogenous uncertainty whereas, by contrast, cultural distance and choices pertaining to corporate scope and product or process development activities involve endogenous sources of uncertainty that investors can both assess and act upon without having to "wait and see". Using a sample of 6472 Sino-foreign JVs, we find support for our predictions. We discuss and implement proper methods to test for the existence of null effects, as is relevant to establish the boundaries of a theory such as real options theory. We draw implications for research and practice on JVs – specifically equity share decisions, which deserve more attention – and real options, including suitable uses and desirable extensions of the concept.

Keywords

alliances and joint ventures, China, equity shares, real options, uncertainty, international markets, decision making

Discipline

International Business | Strategic Management Policy

Research Areas

Strategy and Organisation

Publication

Academy of Management Proceedings

First Page

QQ1

Last Page

QQ6

Identifier

10.5465/AMBPP.2006.22896816

Publisher

Academy of Management

Additional URL

http://dx.doi.org/10.5465/AMBPP.2006.22896816