OPERATING FLEXIBILITY, GLOBAL MANUFACTURING, AND THE OPTION VALUE OF A MULTINATIONAL NETWORK

The multinational corporation is a network of activities located in di fferent countries. The value of this network derives from the opportun ity to benefit from uncertainty through the coordination of subsidiari es which are geographically dispersed. We model this coordination as t he operating flexibility to shift production between two manufacturing plants located in different countries. A stochastic dynamic programmi ng 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 coordina tion has led to changes in the heuristic rules used for performance ev aluation and transfer pricing.