MNEs can create a competitive advantage by ‘melding’ or adapting location-bound and non-location-bound FSAs across international borders. However, this process of melding also entails significant transaction costs which can be abated via internal and external modes of governance, prompting the question: which mode of governance should MNEs choose when engaging in cross-border FSA recombination? Recently, scholars have argued that the ‘optimal’ mode of governance is contingent upon the governance capabilities an MNE possesses: MNEs endowed with high external (Ote) governance capabilities should choose external modes of governance, while MNEs endowed with high internal (Oti) governance capabilities should choose internal or hierarchical modes of governance. However, this perspective has been strongly criticized on the basis of being tautological. In this paper, we seek to demonstrate that the optimal mode of governance is actually contingent upon the type and degree of uncertainty (i.e., endogenous vs. exogenous) in the external environment, rather than the governance capabilities the MNE is endowed with. We adopt a Real Options Theory (ROT) perspective to model the value of internal versus quasi-internal modes of governance under different forms of structural uncertainty, and use option pricing simulations to explore how the optimal choice of governance mode changes in response to changes in the degree of structural uncertainty.
