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Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network

Author

Listed:
  • Bruce Kogut

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Nalin Kulatilaka

    (School of Management, Boston University, 704 Commonwealth Avenue, Boston, Massachusetts 02215)

Abstract

The multinational corporation is a network of activities located in different countries. The value of this network derives from the opportunity to benefit from uncertainty through the coordination of subsidiaries which are geographically dispersed. We model this coordination as the operating flexibility to shift production between two manufacturing plants located in different countries. A stochastic dynamic programming model treats explicitly this flexibility as equivalent to owning an option, the value of which is dependent upon the real exchange rate. The model is extended to analyze hysteresis effects and within-country growth options. We show that the management of across-border coordination has led to changes in the heuristic rules used for performance evaluation and transfer pricing.

Suggested Citation

  • Bruce Kogut & Nalin Kulatilaka, 1994. "Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network," Management Science, INFORMS, vol. 40(1), pages 123-139, January.
    • Handle: RePEc:inm:ormnsc:v:40:y:1994:i:1:p:123-139
    DOI: 10.1287/mnsc.40.1.123
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