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Optimal degree of foreign ownership under uncertainty

Author

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  • Cagatay Bircan

    (European Bank for Reconstruction and Development)

Abstract

This paper studies the determinants and consequences of equity ownership in multinational affiliates. We construct a multi-period model of foreign direct investment with incomplete contracts and uncertainty to analyse the size of equity stakes. The productivity of a multinational parent and its supplier is unknown initially to both sides and revealed only after joint production. This kind of match-specific learning implies a dynamic market for corporate equity with considerable impact on reallocation within narrowly defined industries and trading activity. We identify heterogeneity in productivity to be the key determinant of foreign equity shares, which in turn determine the intensive margin in firm imports and business survival. We test the implications of our theory with plant-level data on ownership shares and find support for the model.

Suggested Citation

  • Cagatay Bircan, 2014. "Optimal degree of foreign ownership under uncertainty," Working Papers 166, European Bank for Reconstruction and Development, Office of the Chief Economist.
    • Handle: RePEc:ebd:wpaper:166
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    More about this item

    Keywords

    equity ownership; foreign direct investment; uncertainty; productivity;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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