Real options flexibility or risk diversification: risk management of US MNEs when facing risk of war

Abstract

Purpose The purpose of this paper is to examine how the risk of war aroused by North Korea’s threatening actions trigger strategic responses from US multinational enterprises (MNEs) operating in South Korea. The authors compare two competing perspectives of real options and risk diversification to see which prevails when US MNEs are facing risk of war. Design/methodology/approach The authors hand collected news articles regarding North Korea’s threatening actions that may trigger strategic responses from MNEs operating in South Korea. The authors use archival data of US MNEs to verify our results. Findings Empirical tests of the two competing perspectives reveal that US MNEs adopt the risk diversification strategy when threatened by the risk of war. However, as MNEs have more available foreign markets outside the host country that is at risk of war, MNEs tend to take an operational flexibility approach more seriously and shift their productions to the remaining global operations. The ownership structure of the subsidiary does not appear to have significant effect on US MNEs’ strategic risk management. Originality/value This paper compares two perspectives, namely, real options and risk diversification, to observe how US MNEs treat their subsidiaries when facing risk of war in South Korea.