Options As A Strategic Investment.epub
High and aggressive competition among companies, rapidly expanding multinational firms, developments in the transportation and communication technologies are forcing small and medium enterprises (SMEs) to develop new strategies to stay alive in an international environment. Internationalization is not only remedy to stay alive for many firms, it also provides high profit potential if managed properly. New markets, new customers, cheaper resources, cheaper factors of production, improved strength and competitiveness of firms are some of the benefits of internationalization. Therefore internationalization is an attractive strategic investment for all types of firms, small or big, private or public.
Options As A Strategic Investment.epub
Strategic investment decisions (SIDs) have substantial effects on the long term financial and operational performance of companies , and have a big impact on the competitive advantage of firms . As one of the strategic investment decisions, internationalization is one of the most important and most complex decisions. It has its unique risks, uncertainties in the process are high and making estimations about future cash flows is very hard.
Main objectives of this study are to stress the importance of internationalization decision making process as one of the strategic investment decisions and to provide a guide for SMEs in the evaluation of their internationalization alternatives financially and strategically. In the light of previous studies, the usage of multiple appraisal approach which includes discounting methods and real options analysis is suggested. Adding real options into the appraisal process helps managers to see strategic implications of the investments from a better perspective.
Internationalization is a very complex strategy for all firms, however when unique characteristics of SMEs; such as inflexible structures, lack of strategic and financial resources, lack of managerial capabilities, lack of adequate information, and lack of adequate public support; are combined to the uncertainty and complexity of the internationalization process, the international expansion becomes even much harder [9-12].
Although the tendency to be risk-averse seems as a barrier for the small-firm internationalization, there are also many motives for international involvement such as; market seeking, efficiency seeking, strategic asset seeking and natural resource seeking , achieving economies of scale , and reducing revenue fluctuation by spreading investment risk over different countries .
The complexity of SID making processes grabs the attention of researchers and academicians. While older studies develop models to evaluate investment projects only from financial perspectives, newer studies try to develop models that evaluate strategic outcomes of the investments and emphasize the importance of integrating financial and strategic analysis tools when making SIDs [2,19-24].
Real options approach which is based on the optionpricing model of Black and Sholes  has been developed in order to assess the value of flexibility (or having options) in a capital investment and widely accepted by academics. According to this model, having flexibility to expand, defer, downsize or quit a capital investment decision has some additional value because these options let companies to make their decisions or change them at some point in time according to their strategic and competitive opportunities .
Li and Rugman  cited that real options theory is applied to four main subjects in international business: the impact of multinationality on corporate performance, the advantages of joint ventures to enter a market, dynamic choice of market entry mode, and the optimal timing of investment decision.
In order to deal with risk and uncertainty in investment decisions, many methods and approaches have been suggested by researchers, such as adjusting discount rate, adjusting forecasted cash flows, using computer simulation (Monte Carlo), certainty equivalents, beta analysis (CAPM), sensitivity analysis, scenario planning, probability analysis (decision trees), real options model and fuzzy sets [4,19,20,23,24,27,36,42-44]. Although some of these approaches are deemed more scientific, such as beta analysis, according to Alkaraan and Northcott , practitioners insist on using simpler and less sophisticated approaches, such as adjusted required rates of return, shortened payback periods and probability analysis.
The study of Verbeeten  showed that when there are high financial uncertainties (exchange rate, interest), firms are more eager to use sophisticated methods and multiple risk adjustment tools simultaneously. Verbeeten was not the only researcher that supported the use of multiple methods, many researchers [2,3,21,22] also stressed the importance of integrating financial and strategic analysis tools when making SIDs.
At the beginning, a team which has members from all departments of the firm to execute the internationalization process should be established. Because internationalization is a complex process, opinions of each department managers are very important. This will also help to analyze the costs, benefits, risks and strategic opportunities of internationalization in a better way.
The fourth step is choosing the best alternative or alternatives according to the results of financial and real options analysis. The results may show that there are many profitable alternatives, in such a case the firm may choose to implement all of them or some of them. In general, internationalization moves are independent alternatives; however limited resources may be one factor that hinders the acceptance of all good alternatives.
As seen on Tables 1 and 2, the analyses show that the first and second alternatives are acceptable, but the third alternative should be rejected according to the results of the analyses seen on Table 3, and alternative 1 is better than alternative 2. Alternatives 1 and 2 were evaluated separately. Both have positive NPVs, but accepting both of them creates a third situation, which is exporting and having JV simultaneously. Sales revenue in that third situation might be different (lower) than the total of sales revenues of the first and second alternatives. Therefore alternatives 1 and 2 should be considered as mutually exclusive. Additionally, the team should also continue with real options analysis before making the decision.
In a highly competitive environment, internationalization is not only necessary to stay alive but also important to gain competitive advantage. The SMEs which decide to go international should be aware of the risks and uncertainties that are waiting for them besides the advantages. Therefore they should take their steps very carefully. It is very important to make sophisticated appraisals and evaluate internationalization alternatives in every aspect, especially from financial and strategic.
Traditional methods generally evaluates investments from only financial perspectives, however in the related literature we see that there is a consensus among many researchers on the integration of strategic evaluation tools into financial analyses. The current study aimed to stress the importance of internationalization decision making process as one of the strategic investment decisions and to provide a guide for SMEs in the evaluation of their internationalization alternatives.
In the light of previous studies, a multiple appraisal approach which includes discounting methods and real options analysis was suggested. An illustrative case study showed that an alternative with a lower NPV in fact may be the best alternative when the real options it creates are evaluated.
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