Preventive and Adaptative Investment Strategies of Geographically Complementary Seaports and Dry Ports under Asymmetric Risk Behaviors

Abstract

Recent decades have witnessed the rapid development of inland and seaborne container trade under the Belt and Road Initiative, which makes the port-hinterland system consisting of seaports and dry ports the backbone of the global supply chain. However, due to their unique geographic positions and socioeconomic functions, seaports and dry ports are vulnerable to diverse risks. These risks can be classified into regular risks, which have a high probability of occurrence but cause low damage, and disruption risks, which have a low probability of occurrence but cause severe damage. Diverse risks seriously affect daily port operations and even cause disruptions to port operations, both in terms of the high probability of occurrence and the potential for serious damage, respectively. To safeguard the operational efficiency of the port-hinterland system and address diverse risks in a targeted manner, port authorities (PAs) consider preventive investments to reduce the probability of regular risks and adaptive investments to reduce the potential damage of disruption risks. However, the key strategic location of maritime trade hubs and inland multimodal hubs, and being in a VUCA (volatility, uncertainty, complexity, ambiguity) environment, make the size and timing of prevention and adaptation by PAs challenging.

First, the complex economic relationships arising from key geographical and strategic locations expose geographically complementary seaport and dry port authorities to strategic choices of cooperation and competition when making investment decisions. Second, asymmetric risk-averse behavior exhibited by seaport and dry port authorities concerning diversified risks can alter the tradeoff between prevention and adaptation. Third, changes in risk probability ambiguity due to information accumulation affect the timing of preventive and adaptive investment made by PAs. Accordingly, this study aims to investigate the size and timing of preventive and adaptive investments for both regular and disruption risks by geographically complementary seaport and dry port authorities that exhibit different risk behaviors operating in competitive and cooperative environments.

This study presents novel prevention and adaptation modeling dimensions for PAs, which provide implications for risk-responsive investment decisions by PAs that exhibit new economic relationships, and enabling us to draw the following conclusions and contributions.

(1) This study incorporates the interaction effects between geographically complementary seaports and dry ports into targeted preventive and adaptive investment decision game models, identifying the free-rider effect between seaports and dry ports, enriching the study of competition and cooperation theories of port-hinterland systems, and bridging the gap in the field of targeted investment decision based on the characteristics of diverse risks. Existing studies have focused more on the impact of economic relationships between and within seaports, as well as between seaports and liner companies, on investment decisions, ignoring the impact on strategic decisions made by PAs of the new economic relationships that have emerged between dry ports, which have grown into inland multimodal hubs with key strategic locations and geographic positions, and seaports. Furthermore, by considering PAs’ targeted prevention and adaptation to address regular and disruption risks with different characteristics and extending to the differentiation of investment strategies, the study fills the gap concerning targeted investment decisions for diversified risks in port risk management. The results indicate that cooperation between ports under geographic complementarities would allow seaports to free-ride on preventive efforts to regular risks, and dry ports to free-ride on adaptive efforts to disruption risks. Also, the differentiation of investment strategies between seaport and dry port authorities would moderate the free-rider effect generated by geographical complementarities. These findings enrich the theory of port supply chain competition and cooperation by including dry ports, which are crucial to hinterland connectivity, in the port risk management framework, and provide practical guidance on addressing the complexity and volatility challenges of PAs with new economic relationships emerging under the Belt and Road initiative.

(2) This study innovatively incorporates asymmetric risk behavior exhibited by seaport and dry port authorities concerning regular and disruption risks into the game model by using the conditional value at risk measure (CVaR), identifying the preventive and adaptive investment priorities, revealing the mechanism by which risk-averse behavior moderates the free-rider phenomenon by increasing the scale of investment, relaxing the assumption of perfect rationality of decision-makers and bridging the gap in the consideration of behavioral factors in port strategic investment decision studies. The unique geographical location of maritime and inland hinterland gateways, coupled with differences in the provision of logistics services, makes seaport authorities more sensitive to climate change-related disruption risks, while dry port authorities are more sensitive to regular risks in daily operations. However, most existing studies have treated PAs as risk-neutral, ignoring the fact that asymmetric risk-sensitive behavior may result in overinvestment or underinvestment in strategic investment decisions. Therefore, it is crucial to incorporate asymmetric risk-averse behavior of seaport and dry port authorities into the decision-making process for preventive and adaptive investment decisions concerning regular and disruption risks. Our analysis shows that risk-averse behavior increases the size of preventive and adaptive investments by PAs, thereby moderating the free-rider effect caused by geographic complementarities. Furthermore, our findings suggest that seaport authorities prioritize adaptation while dry port authorities prioritize prevention in general, and adaptation when risk aversion is low. These findings bridge the gap in the consideration of asymmetric behavioral factors of decision-makers in the field of port operations and strategic management research by relaxing the assumptions of perfectly rational decision-makers, and provide theoretical support for more rational responses to uncertainty challenges and risk-responsive investments by PAs with risk appetite.

(3) This study introduces changes in risk probability ambiguity under information accumulation into the real options game environment through Knightian uncertainty, revealing the mechanism of the role of risk aversion and ambiguity aversion on the optimal preventive and adaptive investment timing choices of PAs, and enriching the study of risk-responsive investment timing decisions in port-hinterland systems under behavioral factors. Given the uncertainty of regular and disruption risks, the perception of risk probabilities by PAs varies over time, creating different levels of ambiguity. Incorporating changes in risk probability ambiguity due to information accumulation into the real options game model can assist PAs in making accurate decisions about the size and timing of preventive and adaptive investments, which have long cycles, high costs, and are irreversible. Our results demonstrate that PAs with risk aversion should make early preventive efforts and late adaptive efforts, whereas those with ambiguity aversion should postpone investments. Furthermore, our analysis shows that under the influence of information accumulation, risk aversion increases prevention and adaptation, while ambiguity aversion reduces both. These findings enrich the research in the field of risk-responsive investment timing for PAs from the perspective of information accumulation and behavioral factors, providing methodological guidance on the optimal timing of PAs for irreversible investments, and facilitating better resource allocation and response to ambiguity challenges by PAs.

Date of Award	30 Jun 2023
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Qin Su (External Supervisor) & Kwai Sang CHIN (Supervisor)