Real option analysis for assessing SMEs' entry modes: an illustrative case study

Abstract

Foreign market entry modes have been a widely discussed topic in literature for its practical relevance in the era of globalization. This research goes through the managerial techniques generally used to assess investments in order to compare them in the application to foreign entry modes. SMEs are the object of the study: because of their structural and financial peculiarities small firms count usually less market entry options and have to optimize the resources available in the internationalization process. Furthermore, SMEs operating in the international context face the same exogenous uncertainties of larger enterprises but have to deal with them with less bargaining power and means: this suggests that SMEs are very sensitive to environmental changes and need to manage their investments with flexibility. The paper employs the real option theory, especially the growth option, to study how small firms can assess entry mode investments in a way that considers post-entry favorable conditions. If things go well, the firm may consider a growth option and the overall value of the investment would increase significantly. The case study of a medium-sized firm from North-East Italy is finally introduced to explain better the ratio under the research and to show, through a comparative analysis, the differences among the quantitative tools applied.