Abstract
The crude oil price volatility plays an essential role for the oil companies when making a strategic investment decision. Different economic and political backgrounds could drive oil companies in North America, Asia, and Europe to make different strategic investment decision. Real options methodology is applied in analyzing the impact of oil price volatility on strategic investment of oil companies in the three regions. The empirical results show that the regional differences do exist, where the relationship between oil price volatility and oil companies' strategic investment in North America shows a reverse U shaped curve; meanwhile in Asia is exhibits a U shaped curve; while that in Europe shows a positive correlated linear relationship. These different regional results of oil price uncertainty could provide companies and governments essential information to make investment and policy decisions based on the according regions.
Highlights
Strategic investment is an approach used by a company when investing, with intention to make the business more successful
It is one of the most important business decisions since such investments can lead to competitive advantages through cost reduction (Golfato et al, 2009) and product differentiation which in turn lead to value creation (Makadok, 2003)
The finding of this study is that the regional variety does exist in the relationship between oil price uncertainty and strategic investment, as the empirical results of the three regions shows dramatic differences
Summary
Strategic investment is an approach used by a company when investing, with intention to make the business more successful. It is one of the most important business decisions since such investments can lead to competitive advantages through cost reduction (Golfato et al, 2009) and product differentiation which in turn lead to value creation (Makadok, 2003). The value creation can be maximized when an optimal investment strategy can be applied. Due to the uncertainties businesses must deal with, the optimal investment strategy is hard to determine. Porter (1980) finds the importance of industry structure in determining optimal investment strategies. The major elements of industry structure include economic and technological environment, competitive advantage, capital divisibility, first-mover advantages and competition intensity. The uncertainties derive from a host of sources, including output and input price (Sant’Anna, 2002), exchange rate (Novaes & Souza, 2005), development time (Silva & Santiago, 2009), regulation and energy resources (Pindyck, 1991; Lopes & Almeida, 2013)
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