Real Options and MNE Flexibility: The Strategic Response of US and EU MNEs to the US-China Trade War

Abstract

Increasing volatility in global trade policies seemingly forces MNEs to seek operational flexibility. However, real options theory which focuses on operational flexibility has rarely considered trade policy as the focal source of uncertainty for international operations. Despite recent scholarly efforts to investigate the economic impact of trade wars, how firms respond to such conflict has been underexplored. Motivated by these gaps in the literature, I engage in a firm-level, real-options analysis of the strategic responses of MNEs invested in a host country involved in a trade war. Specifically, I maintain that MNE subsidiary operations in a trade-war-involved host country exercise real options to counter threats and opportunities that depend on the status of the MNE’s home country. Using the US-China trade war as the empirical context, I use panel data composed of 1,424 US-MNE and 975 EU-MNE Chinese subsidiaries from 2016 to 2019 and conduct a difference-in-differences analysis. The empirical results corroborate the theoretical priors: US and EU MNEs exercise the hybrid options as an adaptive response to the trade war. Also, I find that the multinationality of US and EU MNEs facilitates their exercise of switching options in response to the trade war.