Real options theory and international investment strategy: past, present and future

Abstract

This study reviews the research on international investment strategy from a real options lens and discusses avenues for future research. Uncertainty has been a persistent feature in international business, and multinational enterprises (MNEs) have to deal with uncertainty (e.g., market, political, technological) in strategic decisions concerning foreign market entry mode, scale, and timing. 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. 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. From this perspective, MNEs should design strategies such that they have the flexibility to benefit from upside potentials while containing downside losses in future. 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.