article

Joint Ventures and the Option to Expand and Acquire

Author:

Bruce KogutAuthors Info & Claims

Management Science, Volume 37, Issue 1

Pages 19 - 33

Published: 01 January 1991 Publication History

Abstract

This article develops the perspective that joint ventures are created as real options to expand in response to future technological and market developments. The exercise of the option is accompanied by an acquisition of the venture. It is hypothesized that the timing of the acquisition should be triggered by a product market signal indicating an increase in the venture's valuation. Based on a sample of 92 manufacturing joint ventures, this hypothesis is tested by estimating the effect of product market signals on the hazard of acquisition. The results indicate that unexpected growth in the product market increases the likelihood of acquisition; unexpected shortfalls in product shipments have no effect on the likelihood of dissolution. This asymmetry in the results strongly supports the interpretation of joint ventures as options to expand.

References

[1]

ALLISON, P. D., Event History Analysis. Regression for Longitudinal Event Data, Sage Publications, Beverly Hills, 1984.

[2]

BALAKRISHNAN, S. AND M. KOZA, "Information Asymmetry, Market Failure and Joint Ventures," mimeo, UCLA, 1988.

[3]

BOWMAN, E. H., "Consistency and Optimality in Managerial Decision Making," Management Sci., 9 (1963), 310-321.

Digital Library

[4]

BOWMAN, E. H., "A Risk/Return Paradox for Strategic Management," Sloan Management Rev., 21 (1980), 17-31.

[5]

BRITTAIN, J. W. AND J. H. FREEMAN, "Organizational Proliferation and Density-Dependent Selection: Organizational Evolution in the Semiconductor Industry," in J. R. Kimberly and R. M. Miles (Eds.), The Organizational Life Cycle, Jossey Bass, San Francisco, CA, 1980.

[6]

CAMERER, C., "General Conditions for the Success of Bootstrapping Models," Organizational Behavior and Human Performance, 27 (1981), 411-422.

[7]

CHRISTENSEN, H. K. AND C. A. MONTGOMERY, "Corporate Economic Performance: Diversification Strategy Versus Market Structure," Strategic Management J., 2 (1981), 327-343.

[8]

CONTRACTOR, F., "A Generalized Theorem for Joint Ventures and Licensing Negotiations," J. International Business Studies, 16 (1985), 23-50.

[9]

COX, D. R., "Regression Models and Life Data," J. Royal Statistical Society, (B) 34 (1972), 187-202.

[10]

CYERT, R. M. AND J. G. MARCH, A Behavioral Theory of the Firm, Prentice-Hall, Englewood Cliffs, NJ, 1963.

[11]

DOZ, Y. AND A. SHUEN, "From Intent to Outcome: A Process Framework for Partnerships," INSEAD, working papers, 1988.

[12]

EFRON, B., "The Efficiency of Cox's Likelihood for Censored Data," J. Amer. Statistical Assoc., 72 (1977), 557-564.

[13]

HANNAN, M. AND J. FREEMAN, "The Population Ecology of Organizations," Amer. J. Sociology, 82 (1977), 929-964.

[14]

HARRIGAN, K., Managing for Joint Venture Success, Lexington Books, Lexington, MA, 1986.

[15]

HOGARTH, R. M., Judgment and Choice, Wiley, New York, 1982.

[16]

HULL, J., Options, Futures, and Other Derivative Securities, Englewood Cliffs, Prentice-Hall, NJ, 1989.

[17]

KALBFLEISCH, J. D. AND R. L. PRENTICE, The Statistical Analysis of Failure Time Data, Wiley, New York, 1980.

[18]

KESTER, W., "Today's Options for Tomorrow's Growth," Harvard Business Rev., (March-April 1984).

[19]

KNIGHT, F. H., Risk, Uncertainty, and Profit, University of Chicago, Chicago, IL, 1971; originally published, Houghton-Mifflin, Boston, MA, 1921.

[20]

KOGUT, B., "Joint Ventures: Theoretical and Empirical Perspectives," Strategic Management J., 9 (1988), 319-332.

[21]

KOGUT, B., "The Stability of Joint Ventures: Reciprocity and Competitive Rivalry," J. Industrial Economics, 38 (1989).

[22]

KULATILAKA, N., "The Value of Real Options," unpublished manuscript, Boston University, 1988.

[23]

KUNREUTHER, H., "Extensions of Bowman's Theory on Managerial Decision Making," Management Sci., 15 (1969), 415-439.

Digital Library

[24]

LYLES, M. A., "Learning among Joint Venture Firms," Management Internat. Rev., 28 (1988), 85-97.

[25]

MCDONALD, AND D. SIEGEL, "The Value of Waiting to Invest," Quart. J. Economics, 101 (1986), 707-728.

[26]

MCKELVEY, B. AND H. ALDRICH, "Populations, Natural Selection and Applied Organizational Science," Administration Sci. Quart., 20 (1983), 509-525.

[27]

MAJD, S. AND R. PINDYCK, "Time to Build, Option Value, and Investment Decisions," J. Financial Economics, 18 (1987), 7-27.

[28]

MASON, S. AND R. MERTON, "The Role of Contingent Claims Analysis in Corporate Finance," in Recent Advances in Corporate Finance (E. Altman and M. Subrahmanyam, Eds.), Irwin, New York, 1985.

[29]

MITCHELL, G. R. AND W. F. HAMILTON, "Managing R&D as a Strategic Option," Research-Technology, 31 (1988), 15-22.

[30]

MEAD, W., "Competitive Significance of Joint Ventures," Antitrust Bull., 12 (1967).

[31]

MYERS, S. C., "Determinants of Corporate Borrowing," J. Financial Economics, 5 (1977), 147-176.

[32]

MYERS, S. C., "Finance Theory and Financial Strategy," Interfaces, 14 (1984), 126-137.

Digital Library

[33]

NELSON, R. R. AND S. G. WINTER, An Evolutionary Theory of Economic Change, Harvard University Press, Cambridge, MA, 1982.

[34]

PFEFFER, J. AND P. NOWAK, "Joint Ventures and Interorganizational Interdependence," Administrative Sci. Quart., 21 (1976), 315-339.

[35]

PINDYCK, R., "Irreversible Commitment, Capacity Choice, and the Value of the Firm," American Economic Rev., 78 (1988), 967-985.

[36]

PIORE, M. AND C. SABEL, The Second Industrial Divide, Basic Books, New York, 1984.

[37]

SHAN, W., "An Analysis of Organizational Strategies by Enterpreneurial High-Technology Firms," working paper, Sol C. Snider Enterpreneurial Center, Wharton School, 1988.

[38]

TEECE, D., "Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy," in The Competitive Challenge. Strategies for Industrial Innovation and Renewal, Ballinger, Cambridge, MA, 1987.

[39]

TVERSKY, A. AND D. KAHNEMAN, "Belief in the Law of Small Numbers," Psychological Bull., 2 (1971), 105-110.

[40]

TVERSKY, A. AND D. KAHNEMAN, "Evidential Impact of Base Rates," in Judgement under Uncertainty: Heuristics and Biases (D. Kahneman, P. Slovic, and A. Tversky, Eds.), Cambridge University Press, Cambridge, UK, 1982.

[41]

WERNERFELT, B. AND A. KARNANI, "Competitive Strategy under Uncertainty," Strategic Management J., 8 (1987), 187-194.

Cited By

Arora ABelenzon SPatacconi A(2021)Knowledge Sharing in Alliances and Alliance PortfoliosManagement Science10.1287/mnsc.2020.361467:3(1569-1585)Online publication date: 1-Mar-2021
https://dl.acm.org/doi/10.1287/mnsc.2020.3614
Xu FLuo XZhang HLiu SHuang W(2019)Do Strategy and Timing in IT Security Investments Matter? An Empirical Investigation of the Alignment EffectInformation Systems Frontiers10.1007/s10796-017-9807-621:5(1069-1083)Online publication date: 1-Oct-2019
https://dl.acm.org/doi/10.1007/s10796-017-9807-6
Yang OSugie R(2015)International entrepreneurship and information technology strategies of the multinational enterprises from emerging marketsInternational Journal of Business Information Systems10.1504/IJBIS.2015.06848218:4(469-489)Online publication date: 1-Apr-2015
https://dl.acm.org/doi/10.1504/IJBIS.2015.068482
Show More Cited By

Index Terms

Joint Ventures and the Option to Expand and Acquire
1. Applied computing
  1. Enterprise computing
  2. Law, social and behavioral sciences
    1. Economics
2. Mathematics of computing
  1. Probability and statistics

Recommendations

The Choice Between Joint Ventures and Acquisitions: Insights from Signaling Theory

This paper extends information economics in corporate strategy and organizational governance research by using signaling theory to explain firms' market entry modes. We exploit features of the initial public offering (IPO) context to investigate how ...
Arms Race or Détente? How Interfirm Alliance Announcements Change the Stock Market Valuation of Rivals

Most prior event studies find that the announcement of a new alliance is accompanied by a positive stock market response for the partners. This result has usually been interpreted as evidence for the prevailing view that alliances are effective vehicles ...
Margrabe's option to exchange in a paretian-stable subordinated market

This paper derives the formula for a European option to exchange one asset for another provided that the underlying asset price is logstable. Using the subordination principle of Feller [1] first applied by Hurst, Platen and Rachev [2] to option pricing,...

Comments

Please enable JavaScript to view thecomments powered by Disqus.

Information & Contributors

Information

Published In

cover image Management Science

Management Science Volume 37, Issue 1

January 1991

124 pages

ISSN:0025-1909

Issue’s Table of Contents

Publisher

INFORMS

Linthicum, MD, United States

Publication History

Published: 01 January 1991

Author Tags

Qualifiers

Article

Contributors

Other Metrics

View Article Metrics

Bibliometrics & Citations

Bibliometrics

Article Metrics

20
Total Citations
View Citations
0
Total Downloads

Downloads (Last 12 months)0
Downloads (Last 6 weeks)0

Reflects downloads up to 22 Nov 2024

Other Metrics

View Author Metrics

Citations

Cited By

Arora ABelenzon SPatacconi A(2021)Knowledge Sharing in Alliances and Alliance PortfoliosManagement Science10.1287/mnsc.2020.361467:3(1569-1585)Online publication date: 1-Mar-2021
https://dl.acm.org/doi/10.1287/mnsc.2020.3614
Xu FLuo XZhang HLiu SHuang W(2019)Do Strategy and Timing in IT Security Investments Matter? An Empirical Investigation of the Alignment EffectInformation Systems Frontiers10.1007/s10796-017-9807-621:5(1069-1083)Online publication date: 1-Oct-2019
https://dl.acm.org/doi/10.1007/s10796-017-9807-6
Yang OSugie R(2015)International entrepreneurship and information technology strategies of the multinational enterprises from emerging marketsInternational Journal of Business Information Systems10.1504/IJBIS.2015.06848218:4(469-489)Online publication date: 1-Apr-2015
https://dl.acm.org/doi/10.1504/IJBIS.2015.068482
Schilling M(2015)Technology Shocks, Technological Collaboration, and Innovation OutcomesOrganization Science10.1287/orsc.2015.097026:3(668-686)Online publication date: 1-Jun-2015
https://dl.acm.org/doi/10.1287/orsc.2015.0970
Ferreira MPinto CSerra F(2014)The transaction costs theory in international business researchScientometrics10.1007/s11192-013-1172-898:3(1899-1922)Online publication date: 1-Mar-2014
https://dl.acm.org/doi/10.1007/s11192-013-1172-8
Resca AZa SSpagnoletti P(2013)Digital platforms as sources for organizational and strategic transformationJournal of Theoretical and Applied Electronic Commerce Research10.4067/S0718-187620130002000068:2(71-84)Online publication date: 1-Aug-2013
https://dl.acm.org/doi/10.4067/S0718-18762013000200006
Alvarez SBarney JAnderson P(2013)Forming and Exploiting OpportunitiesOrganization Science10.1287/orsc.1110.072724:1(301-317)Online publication date: 1-Jan-2013
https://dl.acm.org/doi/10.1287/orsc.1110.0727
Reuer JRagozzino R(2012)The Choice Between Joint Ventures and AcquisitionsOrganization Science10.1287/orsc.1110.069223:4(1175-1190)Online publication date: 1-Jul-2012
https://dl.acm.org/doi/10.1287/orsc.1110.0692
Gavetti G(2012)PERSPECTIVEOrganization Science10.1287/orsc.1110.064423:1(267-285)Online publication date: 1-Jan-2012
https://dl.acm.org/doi/10.1287/orsc.1110.0644
Pateli A(2011)Strategic objectives affecting the structure of service innovation partnerships in technology-and knowledge-intensive sectorsInternational Journal of Web Engineering and Technology10.5555/2071294.20712966:4(320-334)Online publication date: 1-Oct-2011
https://dl.acm.org/doi/10.5555/2071294.2071296
Show More Cited By

View Options

View options

Login options

Check if you have access through your login credentials or your institution to get full access on this article.

Full Access

Get this Publication

Media

Figures

Other

Tables

View Issue’s Table of Contents