A Strategic Investment Decision: “Internationalization of SMEs”: A Multiple Appraisal Approach and Illustration with a Case Study

Asuman Atik

Department of Business Administration, Marmara University, Istanbul, Turkey.

DOI: 10.4236/ib.2012.42017                

Abstract

In a highly competitive environment, internationalization is a very attractive strategic investment for all types of firms. However, making the decision on internationalization, like other strategic investments, is very difficult because of high uncertainties and risks. Additionally, decision making process should include the evaluation of the strategic outcomes of internationalization. This study offers to integrate real options analysis into financial analyses in order not to overlook the strategic benefits of internationalization alternatives. A clear-cut approach which includes discounting methods and real options analysis is suggested and explained with a case study.

Keywords

Strategic Investment Decisions; SIDs; Discounting Methods; Real Options Analysis; Internationalization; SMEs

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	C. Carr and C. Tomkins, “Strategic Investment Decisions: The Importance of SCM: A Comparative Analysis of 51 Case Studies in U.K., U.S. and German Companies,” Management Accounting Research, Vol. 7, No. 2, 1996, pp. 199-217. doi:10.1006/mare.1996.0012
[2]	R. W. Adler, “Strategic Investment Decision Techniques: The Old and the New,” Business Horizons, Vol. 43, No. 6, 2000, pp.15-22. doi:10.1016/S0007-6813(00)80017-8
[3]	F. Lefley and M. Morgan, “A New Pragmatic Approach to Capital Investment Appraisal: The Financial Appraisal Profile,” International Journal of Production Economics, Vol. 55, No. 3, 1998, pp. 351-341. doi:10.1016/S0925-5273(98)00089-9
[4]	F. H. M. Verbeeten, “Do Organizations Adopt Sophisticated Capital Budgeting Practices to Deal with Uncertainty in the Investment Decision? A Research Note,” Management Accounting Research, Vol. 17, No. 1, 2006, pp. 106-120.
[5]	N. Hermes, P. Smid and L. Yao, “Capital Budgeting Practices: A Comparative Study of the Netherlands and China,” International Business Review, Vol. 16, No. 5, 2007, pp. 630-654. doi:10.1016/j.ibusrev.2007.05.002
[6]	D. Brounen, A. De Jong and K. Koedijk, “Corporate Finance in Europe: Confronting Theory with Practice,” Financial Management, Vol. 33, No. 4, 2004, pp. 71-101.
[7]	P. A. Ryan and G. P. Ryan, “Capital Budgeting Practices of the Fortune 1000: How Have Things Changed?” Journal of Business and Management, Vol. 8, No. 4, 2002, pp. 355-364.
[8]	P. W. Beamish, “The Internationalization Process for Smaller Ontario Firms: A Research Agenda,” Research in Global Business Management, Vol. 1, 1990, pp. 77-92.
[9]	J. C. Casillas, A. M. Moreno and F. J. Acedo, “Internationalization of Family Businesses: A Theoretical Model Base on International Entrepreneurship Perspective,” Global Management Journal, Vol. 3, No. 2, 2010, pp. 18-35.
[10]	J. L. Ward, “Growing the Family Business: Special Challenges and Best Practices,” Family Business Review, Vol. 10, No. 1, 1998, pp. 323-337.
[11]	Z. Fernandez and M. J. Nieto, “Internationalization Strategy of Small and Medium-Sized Family Businesses: Some Influential Factors,” Family Business Review, Vol. 18, No. 1, 2006, pp. 2-23.
[12]	Internationalization of European SMEs, European Commission Report, 2010. http://ec.europa.eu/.../sme/.../internationalisation_of_european_smes_final_en.pdf
[13]	R. Narula and J. Dunning, “Industrial Development, Globalization and Multinational Enterprises: New Realities for Developing Countries,” Oxford Development Studies, Vol. 28, No. 2, 2000, pp. 141-167. doi:10.1080/713688313
[14]	J. W. Lu and P. W. Beamish, “International Diversification and Firm Performance: The S-Curve Hypothesis,” Academy of Management Journal, Vol. 47, No. 4, 2004, pp. 598-609. doi:10.2307/20159604
[15]	W. C. Kim, P. Hwang and W. P. Burgers, “Multinationals’ Diversification and the Risk-Return Trade-Off,” Strategic Management Journal, Vol. 14, No. 4, 1993, pp. 275-286. doi:10.1002/smj.4250140404
[16]	M. Asgari, Z. A. Syed and M. I. Gurrib, “Explaining the Internationalization Process of Malaysian Service Firms,” International Journal of Trade, Economics and Finance, Vol. 1, No. 1, 2010, pp. 68-73.
[17]	F. F. Lemos, J. Johanson and J. E. Vahlne, “Risk Management in the Internationalization Process of the Firm: A Note on the Uppsala Model,” Journal of World Business, Vol. 46, No. 2, 2011, pp. 143-153. doi:10.1016/j.jwb.2010.05.008
[18]	J. G. Frynas, and K. Mellahi, “Global Strategic Management,” 2nd Edition, Oxford University Press, Oxford, 2011.
[19]	F. Alkaraan and D. Northcott, “Strategic Capital Investment Decision-Making: A Role for Emergent Analysis Tools? A study of Practice in Large UK Manufacturing Companies,” The British Accounting Review, Vol. 38, No. 2, 2006, pp. 149-173. doi:10.1016/j.bar.2005.10.003
[20]	F. Lefley, “Approaches to Risk and Uncertainty in the Appraisal of New Technology Capital Projects,” International Journal Production Economics, Vol. 53, No. 1, 1997, pp. 21-33. doi:10.1016/S0925-5273(97)00106-0
[21]	M. M. Akalu, “The process of Investment Appraisal: The Experience of 10 Large British and Dutch Companies,” International Journal of Project Management, Vol. 21, No. 5, 2003, pp. 355-362.
[22]	C. Carr, K. Kolehmainen and F. Mitchell, “Strategic Investment Decision Making Practices: A Contextual Approach”, Management Accounting Research, Vol. 21, No. 3, 2010, pp. 167-184. doi:10.1016/j.mar.2010.03.004
[23]	M. G. Abdel-Kader and D. Dugdale, “Investment in Advanced Manufacturing Technology: A Study of Practice in Large U.K. Companies,” Management Accounting Research, Vol. 9, No. 3, 1998, pp. 261-284. doi:10.1006/mare.1998.0071
[24]	T. M. Alessandri, D. N. Ford, D. M. Lander, K. B. Leggio and M. Taylor, “Managing Risk and Uncertainty in Complex Capital Projects,” The Quarterly Review of Economics and Finance, Vol. 44, No. 5, 2004, pp. 751-767. doi:10.1016/j.qref.2004.05.010
[25]	F. Lefley, “Capital investment Appraisal of Advanced Manufacturing Technology,” International Journal Production Research, Vol. 32, No. 12, 1994, pp. 2751-2776. doi:10.1080/00207549408957098
[26]	R. H. Pike, “A Longitudinal Survey on Capital Budgeting Practices,” Journal of Business Finance and Accounting, Vol. 23, No. 1, 1996, pp. 79-92. doi:10.1111/j.1468-5957.1996.tb00403.x
[27]	G. C. Arnold and P. D. Hatzopoulos, “The Theory-Practice Gap in Capital Budgeting: Evidence from the United Kingdom,” Journal of Business Finance and Accounting, Vol. 27, No. 5-6, 2000, pp. 603-626. doi:10.1111/1468-5957.00327
[28]	J. R. Graham and C. R. Harvey, “The Theory and Practice of Corporate Finance: Evidence from the Field,” Journal of Financial Economics, Vol. 60, No. 2-3, 2001, pp. 187-243. doi:10.1016/S0304-405X(01)00044-7
[29]	C. Carr, “Are German, Japanese and Anglo-Saxon Strategic Styles Still Divergent in the Context of Globalization?” Journal of Management Studies, Vol. 42, No. 6, 2005, pp. 1155-1188. doi:10.1111/j.1467-6486.2005.00537.x
[30]	M. M. Akalu, “Re-Examining Project Appraisal and Control: Developing a Focus on Wealth Creation,” International Journal of Project Management, Vol. 19, No. 1, 2001, pp. 375-383. doi:10.1016/S0263-7863(00)00019-3
[31]	F. Lefley and J. Sarkis, “The Decline of the Accounting Rate of Return (ARR)”, Management Accounting, Vol. 6, No. 1, 1997, pp. 50-52.
[32]	J. F. Weston, S. Besley and E. F. Brigham, “Essentials of Managerial Finance,” 11th Edition, The Ddryden Press, New York, 1996.
[33]	A. K. Dixit and R. S. Pindyck, “The Options Approach to Capital Investment,” Harvard Business Review, 1995, pp. 105-115.
[34]	F. Black, and M. Scholes, “The Pricing of Option and Corporate Liabilities,” Journal of Political Economy, Vol. 81, No. 3, 1973, pp. 637-654. doi:10.1086/260062
[35]	D. M. Lander and G. E. Pinches, “Challenges to the Practical Implementation of Modeling and Valuing Real Options,” The Quarterly Review of Economics and Finance, Vol. 38, No. 2, 1998, pp. 537-567. doi:10.1016/S1062-9769(99)80089-1
[36]	D. E. Stout, H. Qi, Y. A. Xie and S. Liu, “Incorporating Real-Options Analysis into the Accounting Curriculum,” Journal of Accounting Education, Vol. 26, No. 4, 2008, pp. 213-230. doi:10.1016/j.jaccedu.2009.03.002
[37]	Y. C. Jan, “Strategic Investment in Taiwan Chain and Franchise Stores: A Real Options and Game-Theoretic Approach,” Global Journal of Business Research, Vol. 5, No. 4, 2011, pp. 25-37.
[38]	J. Bengtsson, “Manufacturing Flexibility and Real Options: A Review,” International Journal Production Economics, Vol. 74, No. 1-3, 2001, pp. 213-224. doi:10.1016/S0925-5273(01)00128-1
[39]	J. Li and A. M. Rugman, “Real Options and the Theory of Foreign Direct Investment,” International Business Review, Vol. 16, 2007, pp. 687-712. doi:10.1016/j.ibusrev.2007.08.004
[40]	H. T. J. Smith and L. Trigeorgis, “Strategic Options and Games in Analyzing Dynamic Technology Investments,” Long Range Planning, Vol. 40, No. 1, 2007, pp. 84-114. doi:10.1016/j.lrp.2007.02.005
[41]	H. T. J. Smit and L. Trigeorgis, “Real Options and Games: Competition, Alliances and Other Applications of Valuation and Strategy,” Review of Financial Economics, Vol. 15, No. 2, 2006, pp. 95-112. doi:10.1016/j.rfe.2005.12.001
[42]	K. D. Miller and H. G. Waller, “Scenarios, Real Options and Integrated Risk Management,” Long Range Planning, Vol. 36, No. 1, 2003, pp. 93-107. doi:10.1016/S0024-6301(02)00205-4
[43]	F. Cescon, “Investment in New Manufacturing Systems: An Italian-Based Empirical Analysis,” Economia Aziendale Online 2000 Web, Vol. 1, No. 1, 2010, pp. 13-26.
[44]	C. Kahraman, D. Ruan and E. Tolga, “Capital Budgeting Techniques Using Discounted Fuzzy versus Probabilistic Cash Flows,” Information Sciences, Vol. 142, No. 1-4, 2002, pp. 57-76. doi:10.1016/S0020-0255(02)00157-3