The Effects of Abandonment Options on Investment Timing and Profit Sharing of FDIReport as inadecuate

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Discrete Dynamics in Nature and Society - Volume 2017 2017, Article ID 5141975, 11 pages -

Research Article

School of Management, Huazhong University of Science and Technology, 430074 Wuhan, China

Basic Teaching and Research Section, Wuhan Electronic Information Institute, 430019 Wuhan, China

Correspondence should be addressed to Weiwei Zhang

Received 13 June 2016; Accepted 11 January 2017; Published 9 April 2017

Academic Editor: Paolo Renna

Copyright © 2017 Weiwei Zhang and Minggao Xue. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


The paper incorporates cooperative game theory into a real option method in a foreign direct investment setting and examines the operational decisions of a multinational corporation in a cooperative framework, where the corporation is endowed with an abandonment option and shares its profit with the host country. In particular, we investigate how the abandonment options affect the optimal investment timing and the optimal profit share of a foreign direct investment using a real option game method. We show that the flexibility of the abandonment option induces the corporation to investment earlier, which indicates the negative effects on investment trigger. The result is consistent with intuition since the abandonment option provides insurance and thus reduces the overall risk of the project. We also find that the introduction of the abandonment option reduces the optimal profit share in a cooperative framework and in turn the lower profit share increases the investment trigger, thereby having a positive effect on the investment threshold to hinder the investment. By numerical analysis, we find that the overall effect of the abandonment options is inversely related to the investment trigger. These findings provide quantitative analysis about the decisions regarding cooperation in international investment extraction projects.

Author: Weiwei Zhang and Minggao Xue



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