The value of switching and growth options in foreign direct investment

According to real options theory, foreign direct investments can be structured in ways that allow firms flexibility under environmental uncertainty. Through the options built into these investments, multinational companies can capture upside opportunities and contain downside risks stemming from the environment. Prior empirical studies on real options investments, however, have shown mixed or inconclusive results about the real options value of foreign direct investment. In this dissertation we argue that this may be due to the fact that these studies do not fully take into account the different types of environmental uncertainty faced by firms, the potentially contradictory interplay among different types of options embedded in an investment, and/or managerial costs of creating and managing real options. The purpose of this dissertation is to address these problems in the multinational flexibility literature.;In the main essay, 'Growth and Switching Options in Foreign Direct Investments,' we examine in greater depth the two important perspectives of real options associated with foreign direct investments, growth and switching. We show that the ability to derive growth and switching options depends on the way in which foreign direct investments are configured across countries. Furthermore, these configurations of foreign direct investments are argued to have different theoretical implications for firm value under different types of host country uncertainty. Using panel data of Korean foreign direct investment during the period 1991-2004, a period encompassing varying conditions of uncertainty in host countries, we find that, consistent with our expectations, firms with switching options (gained through highly dispersed operations and higher levels of ownership across countries) were associated with higher value in periods of higher exchange rate uncertainty than those without such options. As predicted, we also find that firms with growth options (gained through concentrated presence of subsidiaries in specific countries and lower levels of ownership) were associated with higher value in conditions of host market uncertainty than firms without such option.;Additionally, we found that greater cultural distance between host and home countries within the international network reduces the value of switching options, most likely due to the additional transactions costs associated with it. On the other hand, higher ownership levels lessen this negative impact of cultural distance. The findings associated with ownership and cultural distance within the firm's international network point to the relevance of managerial control and coordination within the realm of real options. Finally, we found evidence supporting the notion that firms make future investment choices based on their expected needs for real options. When firms desire switching options, we find that they add to their breadth by establishing a new subsidiary in new countries. When the need for growth options is greater, they add a new subsidiary in countries in which they already have investments.