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• Dr. Michael J. Leiblein
  Associate Professor of Management
  Fisher College of Business
  The Ohio State University

Real option theory suggests that multinational firms endowed with growth and switching options are able to reduce downside risk more than domestic firms by adapting operations to changes in inputs, cost or demand fluctuations. However, empirical evidence associating indicators of the presence of options to downside risk remains mixed and inconclusive. This paper attributes this conflicting evidence to the omission of organizational option recognition abilities highlighted by behavioral real option theory. Specifically, the paper proposes and tests in a large sample of both domestic and multinational U.S.-listed firms whether associations between uncertainty, multinational switch flexibility, and firm downside risk management are contingent on Managerial Real Option Awareness. Our analysis indicates that awareness strongly affects the association between multinational investment in growth and switch options and firm downside risk. The positive relationship found previously between multinationality and downside risk reverses sign when the interaction with awareness is included. Multinational enterprises with high awareness of real options attain better downside-risk management than other MNEs (with no or low awareness) or domestic firms, raising the question whether domestic firms should internationalize.