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Multinational Real Options and Hysteresis: An Examination of FDI in Manufacturing and Hard- and Soft-Service Industries

Author

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  • H. Young Baek
  • David Cho
  • Dong-Kyoon Kim

Abstract

Growth option benefits in foreign direct investment may be limited by a low probability of exercise due to less demand or corporate focus change. Acquisitions driven by management self-interest may even decrease shareholder wealth. Flexibility option benefits are negligible among soft-service multinational enterprises (MNEs), but are better realized by hard-service MNEs, which are operationally less encumbered by hysteresis than manufacturing MNEs. For 235 foreign acquisitions announced by U.S. firms during 1999 and 2000, flexibility options have a positive effect on shareholder value especially for the hard-service acquirers, which are less subject to the muting effects of hysteresis.

Suggested Citation

  • H. Young Baek & David Cho & Dong-Kyoon Kim, 2012. "Multinational Real Options and Hysteresis: An Examination of FDI in Manufacturing and Hard- and Soft-Service Industries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(0), pages 7-19, January.
    • Handle: RePEc:mes:emfitr:v:48:y:2012:i:0:p:7-19
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