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Foreign direct investment and host country policies: A rationale for using ownership restrictions

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  • Karabay, Bilgehan

Abstract

This paper examines host governments' motivation for restricting ownership shares of multinational firms (MNFs) in foreign direct investment (FDI) projects. An MNF with a productivity advantage is willing to invest in a host country. The host government wants to capture the MNF's surplus yet cannot observe it due to the MNF's private information about its firm-specific advantage. In contrast, a joint venture (JV) partner might observe this surplus depending on its ownership share. The host government can alleviate its informational constraints by using ownership restrictions to force a JV. This calls into question the wisdom of calls for 'liberalizing' FDI flows by the wholesale elimination of domestic JV requirements. We show that the optimal mechanism involves ownership restrictions that decrease as the size of the MNF's firm-specific advantage increases.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 93 (2010)
Issue (Month): 2 (November)
Pages: 218-225

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Handle: RePEc:eee:deveco:v:93:y:2010:i:2:p:218-225

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Web page: http://www.elsevier.com/locate/devec

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Keywords: Ownership FDI Multinationals Regulation Asymmetric information;

References

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Cited by:
  1. Bilgehan Karabay & Gernot Pulverer & Ewa Weinmüller, 2009. "Foreign Ownership Restrictions: A Numerical Approach," Computational Economics, Society for Computational Economics, vol. 33(4), pages 361-388, May.
  2. Cagatay Bircan, 2013. "Foreign direct investment and wages: does the level of ownership matter?," Working Papers 157, European Bank for Reconstruction and Development, Office of the Chief Economist.

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