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Cultural differences, insecure property rights and the mode of entry decision

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  • Jiahua Che

    ()

  • Giovanni Facchini

    ()

Abstract

We develop a theory of a multinational corporation's optimal mode of entry in a new market. The foreign firm can choose between a licensing agreement, a wholly owned subsidiary or shared control (joint venture). In an environment in which property rights are insecure, opportunism is possible, and the identification of new business opportunities is costly, we show that the relationship between the quality of the institutional environment and the mode of entry decision is non-monotonic. Licensing is preferred if property rights are strictly enforced, while a joint venture is chosen when property rights are poorly enforced. For intermediate situations, the better use of local knowledge made possible by shared control under a joint venture works as a double-edged sword. On the one hand, it makes the monitoring activity of the multinational more credible, on the other it offers insurance to both parties, potentially compromising the incentives faced by the local partner.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 38 (2009)
Issue (Month): 3 (March)
Pages: 465-484

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Handle: RePEc:spr:joecth:v:38:y:2009:i:3:p:465-484

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Related research

Keywords: Multinational corporations; Mode of entry decision; Joint ventures; F23; L24;

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  1. McCalman, Phillip, 2004. "Foreign direct investment and intellectual property rights: evidence from Hollywood's global distribution of movies and videos," Journal of International Economics, Elsevier, vol. 62(1), pages 107-123, January.
  2. Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers 2005, Harvard - Institute of Economic Research.
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  6. Javorcik, Beata Smarzynska & Saggi, Kamal, 2004. "Technological asymmetry among foreign investors and mode of entry," Policy Research Working Paper Series 3196, The World Bank.
  7. Müller, Thomas & Schnitzer, Monika, 2003. "Technology Transfer and Spillovers in International Joint Ventures," Discussion Papers in Economics 93, University of Munich, Department of Economics.
  8. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, December.
  9. Smarzynska Javorcik, Beata, 2004. "The composition of foreign direct investment and protection of intellectual property rights: Evidence from transition economies," European Economic Review, Elsevier, vol. 48(1), pages 39-62, February.
  10. Markusen, James R., 2001. "Contracts, intellectual property rights, and multinational investment in developing countries," Journal of International Economics, Elsevier, vol. 53(1), pages 189-204, February.
  11. Hauswald, Robert & Hege, Ulrich, 2003. "Ownership and Control in Joint Ventures: Theory and Evidence," CEPR Discussion Papers 4056, C.E.P.R. Discussion Papers.
  12. Nakamura, M. & Xie, J., 1998. "Nonverifiability, noncontractibility and ownership determination models in foreign direct investment, with an application to foreign operations in Japan," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 571-599, September.
  13. Lee, Jeong-Yeon & Mansfield, Edwin, 1996. "Intellectual Property Protection and U.S. Foreign Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 181-86, May.
  14. Jocelyn Glass, Amy & Saggi, Kamal, 2002. "Licensing versus direct investment: implications for economic growth," Journal of International Economics, Elsevier, vol. 56(1), pages 131-153, January.
  15. Ignatius Horstmann & James R. Markusen, 1987. "Licensing versus Direct Investment: A Model of Internalization by the Multinational Enterprise," Canadian Journal of Economics, Canadian Economics Association, vol. 20(3), pages 464-81, August.
  16. repec:hrv:faseco:4784029 is not listed on IDEAS
  17. Elizabeth Asiedu & Hadi Salehi Esfahani, 2001. "Ownership Structure In Foreign Direct Investment Projects," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 647-662, November.
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Cited by:
  1. Giovanni Facchini & Thierry Verdier, 2009. "Symposium on organization, heterogeneity and trade," Economic Theory, Springer, vol. 38(3), pages 433-436, March.
  2. Marlene Grande & Aurora A. C. Teixeira, 2011. "Linking entry mode choices of MNCs with countries’ corruption. A review," OBEGEF Working Papers 008, OBEGEF - Observatório de Economia e Gestão de Fraude & OBEGEF Working Papers on Fraud and Corruption.

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