Multinationality and downside risk: The roles of option portfolio and organization

Multinational operations confer firms a portfolio of switching options that offer potential operating flexibility in the context of input cost variability, helping firms reduce downside risk. We suggest that two conditions may shape the relationship between multinationality and downside risk. When s...

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Bibliographic Details
Published in:Strategic management journal 2014-01, Vol.35 (1), p.88-106
Main Authors: Belderbos, René, Tong, Tony W., Wu, Shubin
Format: Article
Language:English
Subjects:
affiliate portfolio
Affiliates
Business entities
Business risks
Corporate strategies
downside risk
Enterprise risk management
Expatriates
Financial portfolios
Host country
Investment risk
Labor costs
Manufacturers
Manufacturing
Multinational corporations
Multinational enterprises
multinational firm
Multinational operations
organization
Panel data
Portfolio analysis
Risk management
Strategic management
Studies
Support columns
switching option
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Summary:Multinational operations confer firms a portfolio of switching options that offer potential operating flexibility in the context of input cost variability, helping firms reduce downside risk. We suggest that two conditions may shape the relationship between multinationality and downside risk. When subadditivity is present in a firm's option portfolio, such as when the firm operates affiliates in host countries with similar labor cost developments, multinationality is less likely to reduce downside risk since less valuable opportunities exist for shifting operations. Multinationality is more likely to reduce downside risk if a firm's organization facilitates the coordination of cross-border activities, enabling the exploitation of the shifting opportunities. Analysis of a comprehensive panel dataset of Japanese manufacturing firms and their foreign manufacturing affiliates provides support for these conjectures.
ISSN:0143-2095
1097-0266
DOI:10.1002/smj.2087