Host Market Uncertainty, Subsidiary Characteristics, and Growth Option Exercise

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Abstract: This study employs the real options perspective to examine how changes in market demand uncertainty in host countries affect multinational corporations' exercise of their growth options. Specifically, we seek to determine whether multinational corporations (MNCs) increase their investment in foreign subsidiaries under the influence of reduced market demand uncertainty in their host countries. We also examine which foreign subsidiaries are more subject to the investment increase. We find that a foreign investor is more likely to enlarge its foreign subsidiary when its host market demand uncertainty is reduced. We also find that this increase is more salient when a subsidiary has a higher ratio of local sales, localized product, or intermediate goods. Our findings imply that foreign investors respond to changing host market conditions by making flexible investment adjustment based upon subsidiary characteristics. (C) 2016 Elsevier Ltd. All rights reserved.

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