Multinational investment and the value of growth options: Alignment of incremental strategy to environmental uncertainty

Research Summary One of the motivations for multinational firms' investment in foreign affiliates in uncertain environments is the future growth opportunities the investment may bring. We argue that whether firms derive growth option value from their multinational investment is determined by the interaction between market uncertainty and firms' incremental investment strategy. We show evidence that multinational investment creates growth option value for firms operating affiliates in host countries with high market uncertainty. In such uncertain environments, however, incremental investment strategies—limiting the equity stake or the size of investment in affiliates, across all countries or within each country—prove critical to the value of growth options. Creating growth option value therefore requires an alignment of firms' incremental investment strategy to the uncertain country environments they confront.Managerial Summary Managers have long recognized the importance of taking an incremental approach to strategy making, but evidence on whether and when strategic incrementalism is valuable to firms remains scarce. This study focuses on two ways Japanese multinational firms invest incrementally in the context of foreign expansion—by limiting the equity stake or the size of investment in their foreign affiliates—and analyzes when such incremental strategies create valuable growth options that translate into market value. We find that these strategies, whether implemented across all host countries or within each country, do create significant growth option value, provided that market uncertainty is high. The findings highlight the importance of aligning firms' incremental strategy to the environmental uncertainties they confront, in line with the core notion of “fit” in strategic management.