Mode of Entry and Expropriation
AbstractWe develop a politico-economic model to analyze the relationship between mode of entry into a new market and institutional quality of the host country. A foreign investor can either purchase a domestic firm, what we consider as FDI, or form a joint venture, in which the control right over the firm rests with the domestic entrepreneur. In an autocratic regime, the ruling elite uses its political power to implement expropriatory policies. In an integrated firm the risk of expropriation targets the foreign investor whereas in a joint venture the domestic agent bears this risk. We determine the equilibrium level of the probability of expropriation and show that the ruling elite, by choosing it, discriminates in favor of the foreign investor. This has implications for the form of invested capital, and thus for the organizational structure of active firms in the host country. --
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Bibliographic InfoPaper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Hannover 2010 with number 27.
Date of creation: 2010
Date of revision:
Foreign direct investments; joint ventures; property rights; expropriation;
Find related papers by JEL classification:
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- P48 - Economic Systems - - Other Economic Systems - - - Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
This paper has been announced in the following NEP Reports:
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- NEP-IFN-2010-09-25 (International Finance)
- NEP-INT-2010-09-25 (International Trade)
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