TY - JOUR
T1 - A real options model of market entry
T2 - Endogenous uncertainty and exogenous uncertainty
AU - Sears, Joshua B.
N1 - Publisher Copyright:
© 2019 Elsevier Inc.
PY - 2019/9
Y1 - 2019/9
N2 - We develop a real options model of market entry that focuses on the dueling growth and deferral options by differentiating between endogenous uncertainty and exogenous uncertainty. While exogenous uncertainty influences the growth option market value or price, it is endogenous uncertainty that influences the value of the growth option through the ability to create a competitive advantage from preemptive market entry. First, the firm can decrease the exercise price of the growth option (i.e., the cost of the follow-on investment) through experiential learning that reduces endogenous uncertainty. Second, the firm can increase the relative discounted cash flows of the follow-on investment due to its ability to influence market demand that reduces endogenous uncertainty. On the other hand, the value of the deferral option increases with exogenous uncertainty as firms cannot influence exogenous uncertainty, and therefore, should invest elsewhere while waiting for the exogenous uncertainty to subside. As such, we provide a solution to the conundrum that the value of both the growth option and the deferral option increase with uncertainty. Finally, we demonstrate how the model addresses sequential market entry; irreversibility and market entry mode; competition; scarce strategic resources; host country development level; and industry life cycle stage.
AB - We develop a real options model of market entry that focuses on the dueling growth and deferral options by differentiating between endogenous uncertainty and exogenous uncertainty. While exogenous uncertainty influences the growth option market value or price, it is endogenous uncertainty that influences the value of the growth option through the ability to create a competitive advantage from preemptive market entry. First, the firm can decrease the exercise price of the growth option (i.e., the cost of the follow-on investment) through experiential learning that reduces endogenous uncertainty. Second, the firm can increase the relative discounted cash flows of the follow-on investment due to its ability to influence market demand that reduces endogenous uncertainty. On the other hand, the value of the deferral option increases with exogenous uncertainty as firms cannot influence exogenous uncertainty, and therefore, should invest elsewhere while waiting for the exogenous uncertainty to subside. As such, we provide a solution to the conundrum that the value of both the growth option and the deferral option increase with uncertainty. Finally, we demonstrate how the model addresses sequential market entry; irreversibility and market entry mode; competition; scarce strategic resources; host country development level; and industry life cycle stage.
KW - Endogenous uncertainty
KW - Exogenous uncertainty
KW - Internationalization
KW - Market entry
KW - Real options
UR - http://www.scopus.com/inward/record.url?scp=85065198634&partnerID=8YFLogxK
U2 - 10.1016/j.intman.2019.03.003
DO - 10.1016/j.intman.2019.03.003
M3 - Article
AN - SCOPUS:85065198634
SN - 1075-4253
VL - 25
JO - Journal of International Management
JF - Journal of International Management
IS - 3
M1 - 100672
ER -