International Joint Ventures and the Value of Growth Options

Abstract

Real options theory predicts that international joint ventures (IJVs) confer valuable growth options to firms, yet there has been no direct evidence on whether firms actually capture growth option value from such investments and under what conditions. We bridge the gap between theory and evidence by empirically testing this prediction, and we also develop the theoretical arguments that IJVs' ownership structure, product market focus, and geographic location are important attributes influencing the uncertainty surrounding the ventures and the value of embedded growth options. The empirical evidence confirms that IJVs do enhance firms' growth option values, but only under certain circumstances. Specifically, minority IJVs and diversifying IJVs contribute to growth option value, but other types of IJVs do not. The findings also challenge recent claims on the growth option value of investments in emerging economies.

Keywords: Joint Ventures, Real Options, Growth Option Value, International Strategy