• the interdependence of most real options attached to a particular project and, therefore, of their values.
It may be possible to define upper and lower limits to the values of the relevant options. Since it is impossible to include all possible variants and all possible scenarios – the computational requirements would be too great, the technique is based in most cases on a degree of qualita- tive judgement concerning the strength and significance of the rele- vant information. A strategic assessment should exclude from the appraisal most possible variants and concentrate attention only on certain scenarios.
there are significant market imperfections which allow monopoly rents to be earned either because of advantages of locality or, much more likely by the internalisation of existing significant competitive advan- tages which are enterprise-created and mobile. Unless there is some sus- tainable competitive advantage which offsets the range of difficulties associated with operating abroad (Buckley 1996: 118), there is no point in investing abroad. The aim of international investment is to exploit these competitive advantages more fully and to maintain them as long as possible.
One illuminating way of considering the problem of choice is in the context of real options (Buckley 1996: 147–153). Different participa- tion strategies open up differing future options. Foreign direct invest- ment provides a much better opportunity for the enterprise to identify
Stay domestic Develop
sales subsidiary,
service facilities, distribution
system
Enter the global market
Export
Develop a facility abroad
License
Engage in FDI
Take a partner
Go it alone
Acquire
Develop a greenfield
site
Figure 6.2 The mode of entry decision tree
and exploit valuable options than other modes. It also provides a much better opportunity to gain the information required to make an accu- rate appraisal of the full potential of operating within a foreign economy (Buckley 1996: 151). Entry into a new foreign market might be initiated by a pilot project on a minor scale in order to achieve this learning.
It is possible to express the problem in terms of net present value analysis. For each mode there is a base net present value. Choice may be characterised initially by the following situation:
NPV(Ex) > NPV(Lic) > NPV(FDI with partner) > NPV(FDI after acquisition) > NPV(FDI after greenfield development) > 0
However, the addition of an allowance for options values changes this order dramatically, so that for example:
NPV(FDI – greenf.) + Opt(FDI – greenf.) > NPV(Ex.) + Opt(Ex.) It is likely that, given the importance of particular competitive advan- tages, the value of the relevant options may be high (Buckley 1996:
150).
The Investment Process and Decision Making: the Strategic Perspective 103
7
The Investment Process and Decision Making: the Organisational Perspective
…the goals of a business firm are a series of more or less independent constraints imposed on the organization through a process of bargaining among potential coalition members and elaborated over time in response to short-run pressures. Goals arise in such a form because a firm is, in fact, a coalition of participants with disparate demands, changing foci of attention, and limited ability to attend to all organiza- tional problems simultaneously.
(Cyert and March 2001) The present chapter takes an organisational perspective, focusing on the structure of an enterprise. The analysis concentrates on the nature of the enterprise as a network of stakeholder groups who are affected by, and have an influence on, the investment decision. This chapter explores the way in which the joint stock limited liability company privileges the one stakeholder group, the shareholders, and how various risk environments have influenced the development of the organisational framework and the relevant law, notably in the areas of limited liability and bankruptcy. It goes on to show how the way in which key decisions are made reflects relations between different stake- holder groups. These relations determine the distribution of both value and risk. Further sections consider key stakeholder relations, notably those between owners and managers, and between creditors and owners. The organisation of the enterprise and its capital structure pro- vides the context in which investment decisions are made. The capital structure of an enterprise can influence the way in which risk affects the investment decision. The chapter concludes by considering the general nature of the decision-making process.
104
There are six sections in this chapter:
• In the first section there is an outline of the network of stakeholder groups relevant to any investment decision.
• The second section considers the structure of the modern enterprise and how it accommodates risk.
• In the third section the mechanisms for distribution of risk and of the value created by investment projects among relevant stakeholder groups are analysed.
• Section four considers the implications for investment appraisal of the divorce of ownership and control in the context of the risk situation of the two stakeholder groups, owners and managers.
• The fifth section turns to the relationship between creditors and owners in the context of the capital structure of an enterprise.
• Section six reviews the nature of the decision-making process.