Barclay E. James

Real Options: Taking Stock and Looking Ahead

We discuss recent developments in real options theory and its applications to strategic management research, examine the potential difficulties in implementing real options in theory and practice, and propose several areas for future research. Our review shows that real options theory has provided substantial insights into investment and exit decisions as well as into the choice of investment modes. In addition, extant research studies have contributed significantly to our understanding of whether and how organizations can benefit from real options. Future research that addresses difficulties in applications will further advance both real options theory and practice in strategic management. We call for future generations of research to enhance the impact of real options as an emerging dominant conceptual lens in strategic management.

Minority rules: State ownership and foreign direct investment risk mitigation strategy

Business researchers, executives and regulators may assume that state ownership in firms raises risk for private co-investors. After all, private investors are seeking profits while states are seeking welfare. Giving them both equity only confuses the aims of an investment project, complicates the job of investment project managers and raises the overall risk of investment project failure. But these assumptions do not fit the evidence as demonstrated by a well-known risk indicator observable in hundreds of investment projects located in dozens of countries: in countries where initial investment terms are more vulnerable to renegotiation by host country governments, we found that minority rules apply whereby a non-controlling, but still substantial equity investment by a host country government can play a risk-mitigating role. One of the oldest political risks facing foreign (and domestic) private investors is that initial, often quite favorable, terms for long-term investment projects in mining, manufacturing and power generation industries can be unilaterally upended by host country governments. A government official may decide that initial terms setting low tax rates on project profits were too generous, or that local hiring targets were too low. In demanding renegotiation, host country governments have an advantage. Private investors often have substantial plant, property and equipment vulnerable to holdup , maybe even outright expropriation, if demands are not met. In response, private investors should consider enlisting the host country government as a minority co-investor, but only where the broader risk of an investment policy change is substantial. Our contingent recommendation follows from analysis of more than 900 project finance-based foreign direct investment ( project ) deals announced in 53 countries from 1990-2006. These were typically not previously state-owned enterprises undergoing privatization; rather, they were more likely new, greenfield projects like Accionas wind farm project in Mexico, dubbed the 2012 Deal of the Year by Project Finance Magazine, or Enrons Dabhol power project disaster in India during the 1990s. In the Acciona and Enron examples and others, project capital structure provides a window on project risk. Where there was more equity as a percentage of overall capital funding a project, we inferred more project risk in the near term. That is because project