The Choice between Greenfield Investment and Cross-border Acquisition: A Real Option Approach

Gilroy, Bernard Michael and Lukas, Elmar (2005): The Choice between Greenfield Investment and Cross-border Acquisition: A Real Option Approach.

Abstract

The purpose of this study is to formalize the choice of market entry strategy for an individual multinational enterprise (MNE) from a dynamic perspective. It is argued that incorporating a suitable treatment of irreversibility, uncertainty and flexibility related to a MNEs investment decision gives further insights to the choice of cross-border acquisitions to greenfield investment as the preferred entry mode. In most cases, the initial entry strategy serves as a platform allowing the firm to make subsequent investments to exploit host-country advantages and capabilities.We allowfor this by taking a two-step expansion strategy explicitly into account. The evolutionary process of the value of the foreign direct investment includes two stochastic elements as well as the timing that triggers the transition from export to foreign direct investment. The results suggest that uncertainty and future investment opportunities play an important role when it comes to transit from export to the first phase of the foreign direct investment commitment as well as have an impact on the choice of entry strategy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign direct investment; Multinational enterprise; Sequential investments; Entry mode; Greenfield investment; Cross-border acquisition
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity; F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O32 - Management of Technological Innovation and R&D; D - Microeconomics > D9 - Intertemporal Choice > D92 - Intertemporal Firm Choice, Investment, Capacity, and Financing

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