Technical Compatibility and the Mode of Foreign Entry under Network Externalities

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Technical Compatibility and the Mode of Foreign Entry under Network Externalities

Author Info

Mikhail Klimenko () (Georgia Institute of Technology)
Kamal Saggi () (Southern Methodist University)

Additional information is available for the following registered author(s):

Kamal Saggi

Abstract

This paper examines the preferences of a foreign firm and a welfare-maximizing host country government over two modes of foreign direct investment (FDI): de novo entry by the foreign firm and acquisition of the domestic incumbent. Two crucial features of the model are the presence of network externalities and (endogenously determined) partial incompatibility between the technology of the domestic incumbent and that introduced by the foreign firm. The relative impact of the modes of entry on local welfare is determined by the degree of competition (more intense under de novo entry) and the magnitude of the positive network externality (greater under acquisition). The clash between the foreign firm’s equilibrium choice and the local government’s ranking of the two modes of entry might be a potential motivation for policy restrictions that limit the degree of foreign ownership.

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Paper provided by NET Institute in its series Working Papers with number 04-05.

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Length: 30 pages
Date of creation: Oct 2004
Date of revision: Oct 2004
Handle: RePEc:net:wpaper:0405

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Find related papers by JEL classification:
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-08-26 (All new papers)
NEP-NET-2006-08-26 (Network Economics)

References listed on IDEAS
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Other versions:
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