Research On The Impact Of Foreign Direct Investment Entry Mode Based On Real Options Approach

With the globalization of the world economy,the research on the foreign direct investment(FDI)has become the focus of the theoretical and business circles,and the choice of the entry mode of FDI is an important aspect of enterprise strategic decision.For the Cross-border merger and acquisitions(M&A)FDI investors,they have first mover advantage management flexibility,and considerable technical premium.For the FDI investors who entering the country with Greenfield investment,assuming the initial investment and scale is relatively small so they have more choice.When the market demand flourishing and the target enterprise value is higher than a critical value,they could increase investment to expanse enterprise scale;when economy enters a sharp downturn and the target enterprise value is lower than a critical value,they could sale overseas subsidiaries and exit the market.How to describe the FDI investor’s entry mode selection is the key to the research.Based on real option theory,FDI entry mode model is divided into two types,namely Cross-border M&A real option model and Greenfield investment real option model,in the real option framework for FDI investors to enter host country,they have a bundle of real options for future strategic in the beginning(expanding,abandoning and deferring).In order to study determinants of the FDI entry mode choice more objectively,we focus on the investment mode of Cross-border M&A and Greenfield investment,and use the permanent dual-barrier-triggered option model to build real option model of Cross-border M&A and Greenfield investment separately.Based on the risk neutral pricing theory,the analytical expressions of the infinite series pricing for the real options of Cross-border M&A and the Greenfield investment are derived.Permanent bidirectional touch sight option not only combines the dynamic process of FDI expansion and exit the host country,but also take many parameters influence the value of real options and FDI entry mode selection into account,for instance,the uncertainty of market demand,the reversibility of investment cost,the technology premium and FDI investment scale.By numerically simulating the pricing formula of cross-border merger real option and Greenfield investment real option under the dual-barrier-triggered option,the effect of related model parameters on the real option values of cross-border merger andGreenfield investment can be studied.Then estimate the effect of these parameters on the choice of entry mode of FDI investors.The uncertainty of market demand in host country,the reversibility FDI investment,technology premium and the FDI investment scale were choose to be main parameters that affect the real option value of Cross-border M&A and Greenfield investment.In this paper,using the method of numerical simulation on Matlab 2015 b software to get the change of the real options value relative to the four parameters,and put forward four empirical research hypothesis.In order to test the above four hypotheses,overseas investment enterprises according to the Ministry of Commerce(Institutions)"list",collate all cases of foreign direct investment of Listed Companies in Zhejiang province from 2008 to 2015,distinguish their FDI entry mode from Cross-border M&A to greenfield investment.Based on these data samples,use the Logit random effects panel model to study the parameter of real option model: uncertainty,irreversibility,technical premium and the scale of investment how to affect the enterprises in Zhejiang province to choose foreign direct investment entry mode.The results show that the assumption of 1-4 are reasonable,the empirical results show that when host country market demand volatility is higher,the irreversibility of investment is larger,the host country market mechanism is less perfect,FDI investors would prefer to adopt greenfield investment mode.In addition,FDI investors adopt Greenfield investment mode to enter the host country usually commit less resources and obtain smaller scale of production in initial.However the target enterprises own core technology which could bring technical premium does not significantly incentive FDI investors enter host country on cross-border M&A mode.In this paper,providing the perspective of real options and the empirical evidence from the micro level of enterprise to discuss the factors influence the foreign direct investment entry mode choice of enterprises in Zhejiang Province.It is a powerful supplement to the entry mode research literature on the factors of foreign direct investment of Chinese enterprises to some extent.