Real options and an application in automotive industry


Thesis Type: Postgraduate

Institution Of The Thesis: Uludağ Üniversitesi, Turkey

Approval Date: 2007

Thesis Language: Turkish

Student: PINAR ÖZKESERLİ

Supervisor: AZİZE GÜL EMEL

Abstract:

Localization investments are the kind of investments which are made to produce the products that are imported at the present by transferring or developing the required equipment in the country. Localization investments are being made to increase the domestic manufacturing also to reduce costs and import dependency. It is commonly being used in automotive industry because most of the semi products are being imported and this increases the cost noticeably. Because it includes technology transfer, localization investments positively affect the developing economies. Main positive affects obtained by localization are the arrival of the new technology which was not found in the country before, the chance to produce higher quality products and the possible growth in production. Localization investments not only cause OEMs to improve but also help development of involved subsidiary industry. The arrival of the new technology to the country has a positive impact of development of the equipment, workforce and the final product. As a developing economy itself, Turkey encourages these kinds of investments and gives governmental encouragement for them. The problem in the process is the valuation of these investment projects accurately by including all strategic impacts. Just because these kinds of localization projects involve many future growth opportunities, conventional valuation tools cannot value those embedded opportunities correctly so the value of the project mostly appears negative or very low. This situation can cause the misjudgment at the encouragement stage. This paper analyses the localization projects first with conventional NPV analysis, then with modern real options analysis and compares the results. In the analysis, the potential involvement of various option types results as sequential options and binomial lattice is used as a numerical approach in the valuation of a localization investment case from Turkish automotive industry.