Investment in new foreign subsidiaries under receding perception of uncertainty
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Investment in new foreign subsidiaries under receding perception of uncertainty
Jan Hendrik Fisch Lehrstuhl fuer Technologie- und Innovationsmanagement, Zeppelin University, Friedrichshafen, Germany Correspondence: J H Fisch, Lehrstuhl fuer Technologie- und Innovationsmanagement, Zeppelin University, Am Seemooser Horn 20, D-88045 Friedrichshafen, Germany. Tel: þ 49 (0)7541 6009 1261; Fax: þ 49 (0)7541 6009 1199; E-mail: [email protected]
Abstract Research on foreign direct investment has focused considerable attention on the moment of market entry, but less on the dynamics of investment in the post-entry phase. This paper centres the influence of uncertainty on investment, and develops a growth options model to explain the sequence of investment in new foreign subsidiaries. In a learning process that starts at entry, investors perceive receding levels of uncertainty and shift their reason for investment from option values towards net present values. The findings of a panel study of 634 German subsidiaries support the propositions and reveal the potential of the real options approach to improve the understanding of internationalisation processes. Journal of International Business Studies (2008) 39, 370–386. doi:10.1057/palgrave.jibs.8400362 Keywords: foreign direct investment; subsidiary development; real options; uncertainty perception; panel study
Received: 25 December 2005 Revised: 24 July 2007 Accepted: 31 July 2007 Online publication date: 6 March 2008
INTRODUCTION Foreign investors must meet the challenge of establishing subsidiaries under high levels of uncertainty. A common procedure is to start a foreign subsidiary with little capital and enlarge it later by way of subsequent investment. In spite of the large body of literature about foreign direct investment, these sequences have not yet been subject to true dynamic study. Some analyses of international investment recognise the need to investigate the time dimension, but postpone it to future research (Agarwal & Ramaswami, 1992; Gatignon & Anderson, 1988; Mudambi & Mudambi, 2002). Other studies observe sequences of investment but do not intend to explain their timing (Camino & Cazorla, 1998; Erramilli, Srivastava, & Kim, 1999). Studies on the timing of investment are limited to international entries (Chang & Rosenzweig, 2001; Delios & Henisz, 2003; Tan & Vertinsky, 1996). Work on the development of foreign subsidiaries has mainly examined their failures, that is, the causes of international divestment (Benito, 1997; Mata & Portugal, 2000; McCloughan & Stone, 1998). Uhlenbruck (2004) is an exception, but considers the development of subsidiaries as the growth in sales in a single year rather than a sequence of investment over several years. All in all, previous studies of market entries and internationalisation processes do not address the question of investment sequences in the establishment of foreign subsidiaries. Research on multinational enterprise
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