Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network

TLDR

A multinational corporation operates as a network of geographically dispersed activities, whose value stems from the ability to coordinate subsidiaries to exploit uncertainty. The study models this coordination as operating flexibility that allows shifting production between two manufacturing plants in different countries. Using a stochastic dynamic programming framework, the authors treat this flexibility as an option whose value depends on real exchange rates and extend the model to capture hysteresis effects and within‑country growth options. They find that across‑border coordination has altered the heuristic rules used for performance evaluation and transfer pricing.

Abstract

The multinational corporation is a network of activities located in different countries. The value of this network derives from the opportunity to benefit from uncertainty through the coordination of subsidiaries which are geographically dispersed. We model this coordination as the operating flexibility to shift production between two manufacturing plants located in different countries. A stochastic dynamic programming model treats explicitly this flexibility as equivalent to owning an option, the value of which is dependent upon the real exchange rate. The model is extended to analyze hysteresis effects and within-country growth options. We show that the management of across-border coordination has led to changes in the heuristic rules used for performance evaluation and transfer pricing.