Food multinational enterprises investment strategies: An option theory perspective
Abstract
The objective of this study is to shed further light on the internationalization process of food and drink multinational enterprises (MNEs). The multinational firm's expansion problem was formulated in terms of an option pricing model. The empirical validation of this model provides answers to the following questions: (1) do food MNEs managers recognize the value of project's operating flexibility and strategic sequencing in their investment decisions? (2) can the option model serve as a tool to predict firms' future commitment and entry mode into alternative markets? and (3) Do firms which follow the incremental resource investment process represented by the option model display lower investment failure rates? Three important properties which distinguish MNE's growth options from financial options have been taken into account in this study. First, investment decisions of an oligopolistic MNE can affect the income from the subsidiaries owned by that firm, as well as the investment decisions of other firms. Second, if firms have increasing marginal cost of subsidiary development, then the aggregate cost of development depends on the aggregate demand for development. This affects each MNE's optimum exercising policy, and imposes restrictions on the number of actually developed wholly owned subsidiaries. And third, each MNE may hold not one, but a portfolio of options--or shared positions in ventures--within each market. Again, this affects exercise policies and option values. Overall, the option model receives substantial support as a behavioral investment model. The empirical results suggest that all the variable groups taken into account in this study, including synergies between the parent firm and its ventures, market attractiveness and risk, competitive interaction, and investment fit within the firm's resource accumulation pattern, play important roles in determining firm's decisions to engage in divestitures, shared ventures, and wholly owned subsidiaries. Furthermore, the results also support the option model's predictions relative to how the variables interact in shaping the flow of firms' investing decisions. Firms' adherence to the option model is negatively associated with their level of unrelated geographic diversification, is higher for the period 1990-1991 than for 1987-89, and varies across industries. Finally, firm's adherence to the option model is negatively related to investment failure. The results suggest that distribution synergies are critical to reduce investment failure. The additional accumulation of horizontal and differentiation synergies dramatically reduces the firm's tendency to choose shared ventures. The most critical environmental variable affecting the probability that a firm will divest its ventures is the threat of investment opportunity expiration resulting from market entry by rival firms. The effect of this variable is stronger in dynamic than in stable markets, and affects more those firms which don't have strong differentiation synergies.
Degree
Ph.D.
Advisors
Connor, Purdue University.
Subject Area
Agricultural economics|Finance|Management
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