Tony W. Tong

Real Options in International Joint Ventures

This article empirically investigates the determinants of firms’ use of explicit call options to acquire equity in their international joint ventures (IJVs). Such options are an important contractual element of IJVs because they allow a firm to secure a claim on future expansion opportunities and to safeguard itself against various exchange hazards. The authors therefore draw on real options and transaction cost arguments, respectively, to develop hypotheses on the circumstances under which firms use such options. The article underscores the importance of studying the design of alliances in finer grained terms and helps refine the application of real options theory in the alliance context.

Expatriate Utilization and Foreign Direct Investment Performance: The Mediating Role of Knowledge Transfer†

Multinational corporations (MNCs) often assign expatriate executives overseas to transfer knowledge, yet prior research has not specifically examined the utilization of expatriates as a strategic resource to facilitate knowledge transfer and enhance foreign direct investment performance. Drawing from the resource-based view of the firm and the international strategy literature, the authors argue that assignment of particular expatriates to the subsidiary will enhance subsidiary performance and that the knowledge transferred into the subsidiary through expatriates will mediate this relationship. Results based on MNCs’ subsidiaries in China showed that using expatriates with motivation and adaptability for knowledge transfer enhanced subsidiary performance and that this relationship was mediated by knowledge transferred into the subsidiary; using expatriates with technical skills did not directly affect subsidiary performance but had an indirect effect on performance via knowledge transferred into the subsidiary. They also discuss the implications of their findings for the resource-based view of the firm and international strategy research.

Real Options in Strategic Management

Real options theory begins by drawing an analogy between real options and financial options. A financial option is a derivative security whose value is derived from the worth and characteristics of another financial security, or the so-called underlying asset. By definition, a financial option gives its holder the right, but not the obligation, to buy or sell the underlying asset at a specified price (i.e., the exercise price) on or before a given date (i.e., the expiration date). Financial economists Black and Scholes (1973) and Merton (1973) pioneered a formula for the valuation of a financial option, and their methodology has opened up the subsequent research on the pricing of financial assets and paved the way for the development of real options theory.

How Do Real Options Matter? Empirical Research on Strategic Investments and Firm Performance

This paper categorizes and critiques the empirical research strategies that have been employed to test real options theory. Existing research has sought to detect valuable options in firms’ strategic investments as well as to investigate the payoffs from these investments. Our review highlights some of the evidence that has accumulated in recent years for real options theory. We flag some of the most important challenges and tradeoffs associated with the use of different empirical research approaches for testing real options theory in strategic management. The paper concludes by offering a number of research priorities to advance the theory by probing its descriptive validity as well as by addressing its normative aspirations to bridge corporate finance and strategy.

The link between knowledge sharing connections and employee time savings: A social network analysis

Abstract Social network research has shown that knowledge sharing connections facilitate access to valuable resources. However, little is known about which knowledge sharing connections save knowledge seekers the most time on their daily tasks. To address this gap, this research analyses knowledge sharing connections that provide time savings, measured as the time individuals saved on daily tasks as a result of receiving knowledge from other employees. The research evaluates time savings based on the strength of connection, the network distance between the seeker and provider and the provider’s centrality in the network. To conduct this study, the research team analysed a data-set of 10,849 knowledge sharing dyads reported through a survey administered in one department in a large construction and engineering organization. Data were analysed using social network analysis and multiple regression quadratic assignment procedure. Results showed that stronger connections were assessed as more beneficial for time savings, especially when the connections were with central actors who had higher closeness centrality scores. Knowledge seekers also had a higher assessment of time savings when they were closer (in terms of network distance) to the knowledge provider. These results show that knowledge network reach and strong knowledge connections are essential for achieving everyday work efficiency. Furthermore, the results add to theories of strong and weak connections by showing that strong ties are favourable for achieving time savings in the context of construction and engineering organizations.

What Determines the Duration of Patent Examination in China

Although China is now the largest patent filing country in the world, research on the patent examination process and factors affecting examination durations has been scarce. This paper conducts the...

Multinationality and Downside Risk: The Contingent Roles of Option Portfolio Characteristics and Organizational Factors

Multinational operations confer firms a portfolio of switching options that offer the potential for operating flexibility in the context of input cost variability, allowing firms to reduce downside risk. In this paper, we argue that two conditions may shape the relationship between multinationality and downside risk suggested by real options theory. First, when subadditivity is present in a multinational firm’s option portfolio (e.g., when the firm operates affiliates predominantly in host countries with high labor cost correlations), multinationality is less likely to reduce downside risk since less valuable opportunities exist for shifting operations. Second, when a firm’s organization facilitates the coordination of cross-border activities, multinationality is more likely to reduce downside risk because the firm is better able to exploit the shifting opportunities. Analysis of a comprehensive panel dataset of Japanese manufacturing firms and their foreign manufacturing affiliates confirms that the negative impact of multinationality on downside risk is significantly stronger for firms operating in host countries with relatively low labor cost correlations. Increased control and coordination of foreign affiliates associated with greater equity stakes in the affiliates and more intensive expatriate assignment strengthen the relationship between multinationality and downside risk, in particular for those firms operating in host countries with relatively low labor cost correlations.

Multinational Investment and Organizational Risk: A Real Options Approach

Real options theory ascribes unique advantages to the multinational corporation (MNC). By straddling distinct environments determined by country borders, the MNC is positioned to shift value-chain activities across its network of operations in response to changes in foreign exchange rates, factor and product market conditions and so forth (Kogut 1989; Kogut and Kulatilaka 1994). The basic premise is that the MNC possesses a portfolio of switching options, which are not available to rivals maintaining purely domestic operations. Relative to other perspectives on foreign direct investment (FDI), real options theory therefore highlights several unique advantages that accrue to the firm, including dynamic production efficiencies, downside risk reduction and the ability to seize opportunities that may materialize over time. Many scholars have noted the MNC’s operational flexibility and have pointed out the need to understand better the obstacles to realizing value from multinational operation (for example, Dunning and Rugman 1985; Kogut 1985; Ghoshal 1987; Buckley and Casson 1998).