Investment, Capacity Choice and Outsourcing Options under Uncertainty

Abstract

In this paper, we formulate the investment of a firm in a production facility with maximum capacity and outsourcing strategy. Previous research on capacity selection has resulted in explosive capacity and long delay in investment. The possibility that a firm will install a facility with an explosive capacity is slight, and firms can generally outsource production when the demand exceeds the capacity of a facility. The outsourcing strategy is expected to inhibit capacity, accelerate investment, and increase value. In this paper, we simultaneously investigate the optimal investment timing, the size of a facility, and the outsourcing strategy.