Equity commitment under uncertainty: A hierarchical model of real option entry mode choices

• We develop a two-stage model of real option entry mode choices under uncertainty.
• Results are based on sample of U.S. firms in Latin America and the Caribbean, 1980–2005.
• Asset specificity and international experience decrease probability of equity commitment.
• International experience moderates the extent to which firm capabilities matter.
• Marketing intensity and firm size determine entry mode choices between JVs and WOEs.

We develop a hierarchical model of real option entry mode choices under environmental uncertainty and test predictions using a unique sample of U.S. companies expanding in the countries of Latin America and the Caribbean between 1980 and 2005. Our results, based on a probit estimation with sample selection, show that country risk has a significant and negative effect at the primary level of the hierarchy. Sensitivity analysis further distinguishes between which entry modes dive our main results. Taken collectively, our findings suggest that prior acquisition experience, marketing intensity, size, as well as a higher proportion of specific or intangible assets, are key attributes for managers to consider when structuring foreign investments as a portfolio of options. Moreover, we find that international investment experience moderates the extent to which firm capabilities matter by weakening the predicted effects of prior acquisition experience and asset structure when firms make choices regarding equity commitment.