1. ¹School of Management, State University of New York at Buffalo, Buffalo, NY, USA
2. ²Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC, USA

Correspondence: JJ Reuer, Kenan-Flagler Business School, University of North Carolina, McColl Building, Chapel Hill, NC 27599, USA. Tel: +1 919 962 4514; Fax: +1 919 962 4266; E-mail: reuer@unc.edu

Received 31 December 2002; Revised 11 March 2006; Accepted 11 June 2006.

Abstract

In this study, we investigate how multinationality affects firms' risk levels. Our investigation builds on the idea from real options theory that international operations offer switching options to multinational corporations, yet we also emphasize different sources of coordination costs that can mitigate the benefits of operational flexibility. The findings from Tobit models accounting for self-selection underscore the importance of unobserved heterogeneity in the relationships between international investments and risk levels. Consistent with the coordination costs surrounding international operations, we find that the relationship between multinationality and downside risk is curvilinear: risk first declines and then increases as a firm's portfolio of international investments becomes extensive. In addition, downside risk is an increasing function of the average cultural distance between a firm's home base and the host countries in which its foreign subsidiaries operate.