Acquisitions and Real Options: The Greenfield Alternative


Keith D. Brouthers, North Carolina State University, College of Management, 2801 Founders Drive, 1300 Nelson Hall, Raleigh, NC 27695-7229, USA (


Although acquisitions are a popular way to enter new markets, empirical evidence tends to indicate few benefits accrue to acquiring firms. This might be the case because firms use acquisitions when they should be employing an alternative mode of expansion. Applying real options theory to this issue, we suggest that greenfield start-up ventures provide a real option alternative to acquisitions for firms establishing new international subsidiary units. To test this notion we examine a sample of Western European firms entering the emerging economies of Eastern Europe. The evidence suggests that acquisitions are a good choice only when firms enter markets containing low demand uncertainty and when these firms possess acquisition-based strategic flexibility. Overall, our analysis indicates that greenfield ventures appear to provide firms with a real option when making the acquisition decision.