Real options and multinational investments : an empirical study of risk, performance and organisational awareness

DUE TO COPYRIGHT RESTRICTIONS ONLY AVAILABLE FOR CONSULTATION AT ASTON UNIVERSITY LIBRARY AND INFORMATION SERVICES WITH PRIOR ARRANGEMENT This thesis is a cross-disciplinary study of the empirical impact of real options theory in the fields of decision sciences and performance management. Borrowing from the economics, strategy and operations research literature, the research examines the risk and performance implications of real options in firms’ strategic investments and multinational operations. An emphasis is placed on the flexibility potential and competitive advantage of multinational corporations to explore the extent to which real options analysis can be classified as best practice in management research. Using a combination of qualitative and quantitative techniques the evidence suggests that, if real options are explored and exploited appropriately, real options management can result in superior performance for multinational companies. The qualitative findings give an overview of the practical advantages and disadvantages of real options and the statistical results reveal that firms which have developed a high awareness of their real options are, as predicted by the theory, able to reduce their downside risk and increase profits through flexibility, organisational slack and multinationality. Although real options awareness does not systematically guarantee higher returns from operations, supplementary findings indicate that firms with evidence of significant investments in the acquisition of real options knowledge tend to outperform competitors which are unaware of their real options. There are three contributions of this research. First, it extends the real options and capacity planning literature to path-dependent contingent-claims analysis to underline the benefits of average type options in capacity allocation. Second, it is thought to be the first to explicitly examine the performance effects of real options on a sample of firms which have developed partial capabilities in real options analysis suggesting that real options diffusion can be key to value creation. Third, it builds a new decision-aiding framework to facilitate the use of real options in projects appraisal and strategic planning.

Which is the best solar thermal collection technology for electricity generation in north-west India? Evaluation of options using the analytical hierarchy process

This study of concentrating solar thermal power generation sets out to evaluate the main existing collection technologies using the framework of the Analytical Hierarchy Process (AHP). It encompasses parabolic troughs, heliostat fields, linear Fresnel reflectors, parabolic dishes, compound parabolic concentrators and linear Fresnel lenses. These technologies are compared based on technical, economic and environmental criteria. Within these three categories, numerous sub-criteria are identified; similarly sub-alternatives are considered for each technology. A literature review, thermodynamic calculations and an expert workshop have been used to arrive at quantitative and qualitative assessments. The methodology is applied principally to a case study in Gujarat in north-west India, though case studies based on the Sahara Desert, Southern Spain and California are included for comparison. A sensitivity analysis is carried out for Gujarat. The study concludes that the linear Fresnel lens with a secondary compound parabolic collector, or the parabolic dish reflector, is the preferred technology for north-west India.

Integrated assessment of bioelectricity technology options

Power generation from biomass is a sustainable energy technology which can contribute to substantial reductions in greenhouse gas emissions, but with greater potential for environmental, economic and social impacts than most other renewable energy technologies. It is important therefore in assessing bioenergy systems to take account of not only technical, but also environmental, economic and social parameters on a common basis. This work addresses the challenge of analysing, quantifying and comparing these factors for bioenergy power generation systems. A life-cycle approach is used to analyse the technical, environmental, economic and social impacts of entire bioelectricity systems, with a number of life-cycle indicators as outputs to facilitate cross-comparison. The results show that similar greenhouse gas savings are achieved with the wide variety of technologies and scales studied, but land-use efficiency of greenhouse gas savings and specific airborne emissions varied substantially. Also, while specific investment costs and electricity costs vary substantially from one system to another the number of jobs created per unit of electricity delivered remains roughly constant. Recorded views of stakeholders illustrate that diverging priorities exist for different stakeholder groups and this will influence appropriate choice of bioenergy systems for different applications.

Real options and demographic decisions:empirical evidence from East and West Germany

Iyer and Velu (2006) have convincingly argued that contemporary analyses of fertility behaviour fail to explain why a woman (or a couple) will choose to postpone childbirth, and in particular to consider the role of uncertainty in this regard. They have addressed this lacuna in the literature by using a real options approach to model fertility decisions by relating uncertainty experienced by individuals to the likelihood of childbirth. However, they did not present empirical evidence. Since the theory implies the existence of two offsetting effects of uncertainty on fertility decisions, a positive insurance effect and a negative option value effect, it is not easy to reject the theory on the basis of empirical analysis, when one of these effects offsets the other. We construct such a test for East (and also West) Germany during that country's reunification, which takes advantage of the fact that because of the country's strong welfare system, the insurance effect should be dominated by the option value effect, thereby suggesting that the net relationship should be negative. The results provide rather strong support for the real options link, especially for Eastern Germany.

Wage bargaining, privatisation, ability to pay and outside options:evidence from Hungary

This article examines the determinants of short-term wage dynamics, using a sample of large Hungarian companies for 1996–99. We test the basic implications of an efficient contract model of bargaining between incumbent employees and managers, which the data do not reject. In particular, there are structural differences between the ownership sectors consistent with our prior knowledge on relative bargaining strength and unionisation measures. Stronger bargaining position of workers leads to higher ability to pay elasticity of wages, and lower outside option elasticity. Our results indicate that while bargaining position of workers in domestic privatised firms may be weaker than in the state sector, the more robust difference relates to state sector workers versus privatised firms with majority foreign ownership.

Wage bargaining, privatisation, ability to pay, and outside options:evidence from Hungary

This paper examines the determinants of short-term wage dynamics, using a sample of large Hungarian companies for the period of 1996-1999. We test the basic implications of an efficient contract model of bargaining between the incumbent employees and the managers, which we are unable to reject. In particular, there are structural differences between the ownership sectors consistent with our prior knowledge on relative bargaining strength and unionisation measures. Stronger bargaining position of workers leads to higher ability to pay elasticity of wages, and lower outside option elasticity. Our results indicate that while bargaining position of workers in domestic privatised firms may be weaker than in the state sector, the more robust difference relate to state sector workers versus the privatised firms with the majority foreign ownership. We examine several extensions. We augment the bargaining specification by controls related to workers' skills and find that the basic findings are robust to that. We take a closer look at the outside options of the workers. We find some interactive effects, where unemployment modify the impact of availability of rents on wages. We interpret our results as an indication that bargaining power of workers may be affected by changes in their outside options. We also experiment with one concise indicator of reservation wage which is closest to the theoretical model specification and combines sectoral wages, unemployment benefits and regional unemployment levels,. We found that measure performing well. Finally, we found that while responsiveness of wages towards ability to pay is higher in the state sector, variation in wage dynamics is lower. This may indicate some wage smoothing in the state sector, consistent with the preferences of employees.

Real options in management and organizational strategy:a review of decision-making and performance implications

This paper contributes to the debate on the role of real options theory in business strategy and organizational decision-making. It analyses and critiques the decision-making and performance implications of real options within the management theories of the (multinational) firm, reviews and categorizes the organizational, strategic and operational facets of real options management in large business settings. It also presents the views of scholars and practitioners regarding the incorporation and validity of real options in strategy, international management and business processes. The focus is particularly on the decision-making and performance attributes of the real options logic concerning strategic investments, governance modes and multinational operations management. These attributes are examined from both strategic and operating perspectives of decision-making in organizations, also with an overview of the empirical evidence on real options decision-making and performance.

Real options in multinational decision-making:managerial awareness and risk implications

This paper addresses the theme of real options decision-making in multinational corporations (MNCs) and stresses the role of real options attention and managerial learning in company performance. Using a sample of 278 large MNCs with categorised degrees of managerial real options awareness, we examine the risk implications of switching options in multinational operations, and explore the extent to which the real options logic can be classified as “best practice” in decision-making and risk management. Our results reveal that MNCs which have high managerial awareness about their real options are able to reduce their downside risk through multinationality, organisational slack and other firm characteristics. This finding does not apply fully to MNCs without evidence of such an awareness. Also, although real options awareness does not systematically guarantee lower downside risk from operations, supplementary results indicate that MNCs with evidence of significant investment in the acquisition of real options knowledge tend to outperform competitors that are unaware of their real options. This suggests that if real options are explored and exploited appropriately, real options decision-making can result into superior performance for MNCs in the long-term.

Antecedents of strategic flexibility:management cognition, firm resources and strategic options

Purpose: Current conceptualisations of strategic flexibility and its antecedents are theory-driven, which has resulted in a lack of consensus. To summarise this domain the paper aims to develop and present an a priori conceptual model of the antecedents and outcomes of strategic flexibility. Discussion and insights into the conceptual model, and the relationships specified, are made through a novel qualitative empirical approach. The implications for further research and a framework for further theoretical development are presented. Design/methodology/approach: An exploratory qualitative research design is used applying multiple data collection techniques in a branch network of a large regional retailer in the UK. The development of strategic options and the complex relationship to strategic flexibility is investigated. Findings: The number and type of strategic options developed by managers impact on the degree of strategic flexibility and also on the ability of the firm to achieve competitive differentiation. Additionally, the type of strategic option implemented by managers is dependent on the competitive situation faced at a local level. Evidence of managers' limited perception of competition was identified based on their spatial embeddedness. Research limitations/implications: A single, in-depth case study was used. The data gathered is rich and appropriate for the exploratory approach adopted here. However, generalisability of the findings is limited. Practical implications: Strategic flexibility is rooted in the ability of front-line mangers to develop and implement strategic options; this in turn facilitates competitive differentiation. Originality/value: The research presented is unique in this domain on two accounts. First, theory is developed by presenting an a priori conceptual model, and testing through in-depth qualitative data gathering. Second, insights into strategic flexibility are presented through an examination of managerial cognition, resources and strategic option generation using cognitive mapping and laddering technique. © Emerald Group Publishing Limited.

Evaluation of options for energy recovery from municipal solid waste in India using the hierarchical analytical network process

In this paper a Hierarchical Analytical Network Process (HANP) model is demonstrated for evaluating alternative technologies for generating electricity from MSW in India. The technological alternatives and evaluation criteria for the HANP study are characterised by reviewing the literature and consulting experts in the field of waste management. Technologies reviewed in the context of India include landfill, anaerobic digestion, incineration, pelletisation and gasification. To investigate the sensitivity of the result, we examine variations in expert opinions and carry out an Analytical Hierarchy Process (AHP) analysis for comparison. We find that anaerobic digestion is the preferred technology for generating electricity from MSW in India. Gasification is indicated as the preferred technology in an AHP model due to the exclusion of criteria dependencies and in an HANP analysis when placing a high priority on net output and retention time. We conclude that HANP successfully provides a structured framework for recommending which technologies to pursue in India, and the adoption of such tools is critical at a time when key investments in infrastructure are being made. Therefore the presented methodology is thought to have a wider potential for investors, policy makers, researchers and plant developers in India and elsewhere. © 2013 Elsevier Ltd. All rights reserved.

Rethinking policy options for industry:Appropriateness of policies for industry and UK farming and food

Purpose - Studies the implementation of lean supply and partnership relationships in the UK food and farming industry to assess if these types of interventions are effective. Design/methodology/approach - Reviews the challenges affecting the UK supply chain for red meat. Describes the initiatives that were set up to develop a lean supply chain management approach and examines their application in the UK pig and beef industries. Assesses if these changes benefited all participants in the supply chains. Uses semi-structured interviews with key actors in each stage of the supply chain to do this, identifying the power relations within the supply chains and how these affected the outcomes for those participating in the chain. Findings - Concludes that lean initiatives were appropriate for the pig industry but were of limited value for the beef industry. Even within the pig industry, highlights that benefits were not shared equally, with producers, in particular, losing out. Lastly, points out that lean supply chain management is unlikely to be appropriate operationally and commercially in all circumstances in one industry. Argues for a differentiated policy approach and sets out a framework which enables decision makers to select industrial policy options. Research limitations/ implications - Describes the analysis and the framework developed from it. Originality/value - Assesses the effectiveness of lean supply chain management.

Rehabilitation in Charles Bonnet syndrome:a review of treatment options

People with vision loss sometimes experience visual hallucinations associated with Charles Bonnet syndrome. The appearance of these hallucinations often causes anxiety for the sufferer and can be difficult for the attending eye care professional to manage. A review of the literature highlighted a range of visual, pharmacological and social management regimes that may alleviate these hallucinations, albeit using small samples in uncontrolled trials. Eye care practitioners should be aware of methods of rehabilitation in Charles Bonnet syndrome that may lead to resolution of the visual hallucinations.

Using Monte Carlo Methods to Evaluate Sub-Optimal Exercise Policies for American Options

∗This research, which was funded by a grant from the Natural Sciences and Engineering Research Council of Canada, formed part of G.A.’s Ph.D. thesis [1].