Modeling the transitional dynamics of international joint venture policies: An option pricing approach

Article history: Received 25 February 2011 Received in revised form 31 March 2012 Accepted 29 August 2012 Available online 7 September 2012 Real option analysis has been applied to strategies of market entry and global expansion, predominantly in combination with the formation of alliances and joint ventures. Albeit joint venturing based on option pricing theory is studied in both disciplines, financial economics and international business, the link between these strains of literature is not well developed. We use a compound option framework to analyze the impact of decision contingency and learning on formation and duration of joint ventures. Critical thresholds are presented which allow to characterize the conditions under which termination takes place and to estimate the duration of international joint ventures revealing a novel perspective on existing empirical findings. In particular, we find that exchange rate uncertainty and learning have ambiguous effects on investment. While the model also provides a number of new testable predictions the presented closed-form solution can help managers to structure explicit option clauses in JV contracts more efficiently. © 2012 Elsevier Inc. All rights reserved.