Application of Real Options in Global Value Chains: Possibilities and Limitations

Effective insertion in global value chains is now on the agenda for many countries, industries and companies as it is a generally accepted way toward enhancing effectiveness of operations. However, at the same time participation in global value chains creates a number of risks for the companies. Meanwhile, real options are commonly applied as a risk management tool when performing valuation of a certain company or investment project. Because of their ability to take into account future developments in the market or even some changes in geopolitical situation, they enable to add into analysis the respective managerial decisions corresponding to these scenarios. In this paper we analyse how real options can be applied in value chains with different types of governance. We develop a methodology to consider the limitations imposed by a particular pattern of interactions between the companies in the value chain, and how the power asymmetry, completeness or incompleteness of contracts and specifity of investments impact the real options application.