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Keywords:

  • real options;
  • operational flexibility;
  • foreign direct investment;
  • international production networks;
  • location decision

Abstract

Volatile factor cost developments urge manufacturing firms to increase production efficiency by building up facilities in multiple countries. Differing from previous work that examines the quality of individual locations for investment, the study evaluates the net present value, the growth option value, and the operational flexibility value of the existing production network to predict the establishment of a new site. The results on a sample of 352 German manufacturing firms suggest that the direction, uncertainty, and diversity of labor cost movements in the extant locations influence the propensity to set up a new production subsidiary. Analyzing the international production network after the expansion shows that the new location increases the value of the network regarding these dimensions. Copyright © 2012 John Wiley & Sons, Ltd.