WHAT MAKES AND WHAT DOES NOT MAKE A REAL OPTION? A STUDY OF INTERNATIONAL JOINT VENTURES.

Recently, questions have emerged about the boundaries of real options logic when the firm that made an option-like investment can subsequently affect the parameters of the decision. This paper examines this issue conceptually and empirically, with an application to joint ventures. Uncertainty is widely held to be a principal motivation for using joint ventures to expand internationally, as well as to be a predictor of investments in real options. We distinguish between forms of uncertainty which resolve endogenously versus exogenously, and theorize that only exogenous uncertainty will have the impact predicted by real options theory. Using a sample of 6,472 Sino-foreign joint ventures established between 1979 and 1996, we show that investors' choices of equity shares are indeed consistent with real options predictions when uncertainty resolves exogenously, but not when uncertainty resolves endogenously. We discuss implications for real options research and joint venture research.