Flexibility versus commitment: MNEs’ ownership strategy in China

We investigate the following important questions in international business. How do multinational enterprises (MNEs) choose ownership strategies when facing strong uncertainty in foreign market entries? How are the choices affected by industry contingencies? Following the key tenets of real options theory, we propose that, under a high level of market uncertainty, MNEs choose more flexible (rather than more committed) ownership strategies that allow adjustment of investment decisions in future. We further suggest that using flexible strategies in response to uncertainty becomes less valuable for MNEs when the industry they enter in the host country enjoys strong sales growth potential, requires less irreversible investments, and has intense competition. Empirically, we analyze the ownership strategies (ownership structure and equity share) of over 5000 new foreign investments in manufacturing industries in China during 2000–2006. We find qualified support for our hypotheses, and discuss the industry boundary conditions of adopting flexible ownership strategies in foreign market entries.

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