The Effects of Abandonment Options on Investment Timing and Profit Sharing of FDI

Author:

Zhang Weiwei12ORCID,Xue Minggao1

Affiliation:

1. School of Management, Huazhong University of Science & Technology, 430074 Wuhan, China

2. Basic Teaching and Research Section, Wuhan Electronic Information Institute, 430019 Wuhan, China

Abstract

The paper incorporates cooperative game theory into a real option method in a foreign direct investment setting and examines the operational decisions of a multinational corporation in a cooperative framework, where the corporation is endowed with an abandonment option and shares its profit with the host country. In particular, we investigate how the abandonment options affect the optimal investment timing and the optimal profit share of a foreign direct investment using a real option game method. We show that the flexibility of the abandonment option induces the corporation to investment earlier, which indicates the negative effects on investment trigger. The result is consistent with intuition since the abandonment option provides insurance and thus reduces the overall risk of the project. We also find that the introduction of the abandonment option reduces the optimal profit share in a cooperative framework and in turn the lower profit share increases the investment trigger, thereby having a positive effect on the investment threshold to hinder the investment. By numerical analysis, we find that the overall effect of the abandonment options is inversely related to the investment trigger. These findings provide quantitative analysis about the decisions regarding cooperation in international investment extraction projects.

Funder

National Natural Science Foundation of China

Publisher

Hindawi Limited

Subject

Modeling and Simulation

Cited by 2 articles. 订阅此论文施引文献 订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献

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