Research On Entryand Exit Decisions For Enterprises From Real Option Perspective

To better cater to today’s complex economy, enterprises, the basic units supporting social and economic activities, need to constantly make all kinds of entry and exit decisions. Therefore, the efficiency and accuracy of such decision-making is of utmost importance. At the macro level, the entry and exit of enterprises can be regarded as a barometer of an industry, and a country’s economy at large. If the government can better grasp the essence of enterprises’ entry and exit decision-making mechanism, the effects of industrial policy will be guaranteed. Thus, research on entry and exit decisions for enterprises is not only an inevitable demand for business operation, but an important reference to the national policy.This paper gives the definition of entry and exit behaviors of enterprises at first.Then, comparing the NPV theory and real option model, combining the characteristics of enterprises’ entry and exit decisions, this paper further demonstrates the criteria for whether the enterprises choose to enter or exit and when to conduct. Then this paper determines to use continuous-time real option model, and subdivides uncertainty sources into price and demand uncertainty, introducing net cash ratio and risk tolerance.In terms of price uncertainty, the volume is further discussed both exogenously and endogenously, and for the endogenous part, Cournot model is used to depict the impact of competitors. When it comes to demand uncertainty, Salop model is used to manifest product differentiation and the impact of competitors, and the impact of Poisson jump is considered as well. Then, trapezoidal fuzzy number is applied respectively into each model to characterize decision intervals containing risk tolerance.Finally, numerical analysis is adopted to solve each model. By using the GTA database, the net cash ratio of different industries across the Shanghai and Shenzhen Stock Market can be calculated and estimated. Then a trapezoidal fuzzy number is constructed based on manufacturing data. After setting the risk tolerance, this paper gets the decision intervals for enterprises’ entry and exit decisions in each model. Through single-factor and double-factor sensitivity analysis, the impact of each factor can be reached in terms of specific direction and relative intensity. Therefore, the conclusions are mainly as follows: 1. For monopolistic option, higher volume will make potential entrants enter the business earlier, but make incumbents exit later; for sharing option,more competitors will make potential entrants enter the business later, but make incumbents exit earlier. 2. Competitive advantage has a major impact on potential entrants’ entry decisions, and the enterprise with a greater competitive advantage over other competitors will tend to enter earlier. 3. Lower product differentiation, higher daily operating costs, and a greater number of competitors, will make potential entrantsenter later and incumbents quit earlier. However, with a fixed number of competitors at a certain time, as the product differentiation increases, the daily operating cost has a reduced impact on entry and exit threshold. Based on the numerical analysis and three dimensional diagrams, some suggestions from the perspective of both the enterprises and the government are put forward.