The Value of Corporate and Operational Flexibility Attained by Investments in New Subsidiaries

Abstract

Diversified corporations can increase firm value by investments that enhance their flexibility in response to environmental developments. Specifically, strategy research stresses the corporate flexibility to redirect activities between product markets and the operational flexibility to reallocate activities across foreign locations. So far, however, studies have not analyzed how firms can benefit from both types of flexibility in combination. To this end, our study considers operational flexibility in the context of corporate flexibility and shows that these two types of flexibility are interrelated in a negative way. The study employs real options theory to analyze the switching option value of an investment in a new subsidiary. Moderated mediation analysis of 6,702 subsidiary investments by US firms supports the notion that the antecedents of corporate flexibility interfere with a firm’s ability to leverage operational flexibility. Yet the results also identify compatibility of resources as a means to overcome these negative interactions and as a bridge between corporate and operational flexibility.