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Foreign Direct Investment For Sale

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Author Info

  • Onur Koska

    ()
    (Department of Economics, University of Tuebingen)

Abstract

This study examines the choice of a multinational firm between two alternative entry modes, a greenfield investment and a joint venture, under incomplete information. The joint venture partner is selected by an auction, which distinguishes this study from other studies in the literature. A private values auction allows a multinational firm to increase its share of the joint venture profit so that a joint venture is always preferable to greenfield investment. The model also examines the nationally optimal entry mode and finds that greenfield investment is likely to reduce welfare. The anticipated welfare implications of a joint venture crucially depend on the expectation of the marginal cost of the joint venture. Relative to a greenfield investment, a joint venture is welfare-improving if the negative impact of a joint venture on a local rival's profit is small.

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File URL: http://www.business.otago.ac.nz/econ/research/discussionpapers/DP_0910.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by University of Otago, Department of Economics in its series Working Papers with number 0910.

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Length: 30 pages
Date of creation: Oct 2009
Date of revision: Oct 2009
Handle: RePEc:otg:wpaper:0910

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Related research

Keywords: Foreign Direct Investment; Joint Venture; Incomplete Information; Auction with Externality;

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References

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  1. Horst Raff & Michael Ryan & Frank Stähler, 2006. "Asset Ownership and Foreign-Market Entry," CESifo Working Paper Series 1676, CESifo Group Munich.
  2. Horstmann, Ignatius J & Markusen, James R, 1996. "Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 1-19, February.
  3. Svejnar, Jan & Smith, Stephen C, 1984. "The Economics of Joint Ventures in Less Developed Countries," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 149-67, February.
  4. 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.
  5. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-94, March.
  6. Indrani Roy Chowdhury & Prabla Roy Chowdhury, 2002. "International Joint Ventures: A Welfare Analysis," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 5(1), pages 51-60.
  7. Norbäck, Pehr-Johan & Persson, Lars, 2003. "Privatization Policy in an International Oligopoly," Working Paper Series 608, Research Institute of Industrial Economics.
  8. Valeria Gattai & Corrado Molteni, 2007. "Dissipation of Knowledge and the Boundaries of the Multinational Enterprise," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(1), pages 1-26, April.
  9. Peter J Buckley & Mark C Casson, 1998. "Models of the Multinational Enterprise," Journal of International Business Studies, Palgrave Macmillan, vol. 29(1), pages 21-44, March.
  10. Benjamin Gomes-Casseres, 1990. "Firm Ownership Preferences and Host Government Restrictions: An Integrated Approach," Journal of International Business Studies, Palgrave Macmillan, vol. 21(1), pages 1-22, March.
  11. Hennart, J.-F.M.A., 1991. "The transaction costs theory of joint ventures : an empirical study of Japanese subsidiaries in the United States," Open Access publications from Tilburg University urn:nbn:nl:ui:12-175820, Tilburg University.
  12. Milgrom, Paul, 1989. "Auctions and Bidding: A Primer," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 3-22, Summer.
  13. Paul Klemperer, 2004. "Auctions: Theory and Practice," Economics Papers 2004-W09, Economics Group, Nuffield College, University of Oxford.
  14. Norback, Pehr-Johan & Persson, Lars, 2004. "Privatization and foreign competition," Journal of International Economics, Elsevier, vol. 62(2), pages 409-416, March.
  15. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
  16. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
  17. Norbäck, Pehr-Johan & Persson, Lars, 2002. "Cross-Border Acquisitions and Greenfield Entry," Working Paper Series 570, Research Institute of Industrial Economics.
  18. Erin Anderson & Hubert Gatignon, 1986. "Modes of Foreign Entry: A Transaction Cost Analysis and Propositions," Journal of International Business Studies, Palgrave Macmillan, vol. 17(3), pages 1-26, September.
  19. Mattoo, Aaditya & Olarreaga, Marcelo & Saggi, Kamal, 2001. "Mode of foreign entry, technology transfer, and foreign direct investment policy," Policy Research Working Paper Series 2737, The World Bank.
  20. Mukherjee, Arijit & Sengupta, Sarbajit, 2001. "Joint Ventures versus Fully Owned Subsidiaries: Multinational Strategies in Liberalizing Economies," Review of International Economics, Wiley Blackwell, vol. 9(1), pages 163-80, February.
  21. Peter Nisbet & Wayne Thomas & Stuart Barrett, 2003. "UK direct investment in the United States: a mode of entry analysis," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 10(3), pages 245-259.
  22. Mikhail Klimenko & Kamal Saggi, 2007. "Technical compatibility and the mode of foreign entry with network externalities," Canadian Journal of Economics, Canadian Economics Association, vol. 40(1), pages 176-206, February.
  23. Al-Saadon, Yousef & Das, Satya P., 1996. "Host-country policy, transfer pricing and ownership distribution in international joint ventures: A theoretical analysis," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 345-364, May.
  24. Satya P. Das & Seiichi Katayama, 2003. "International Joint Venture And Host-Country Policies," The Japanese Economic Review, Japanese Economic Association, vol. 54(4), pages 381-394.
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Citations

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Cited by:
  1. Hakan Mıhcı & Selim Çağatay & Onur A. Koska, 2011. "The determinants of foreign direct investment outflows from the European Union countries," Economics Bulletin, AccessEcon, vol. 31(3), pages 2653-2666.

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