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Technological Asymmetry Among Foreign Investors And Mode Of Entry

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  • BEATA S. JAVORCIK
  • KAMAL SAGGI

Abstract

"How does the preferred entry mode of foreign investors depend on their technological capability relative to that of their rivals? This article develops a simple model of entry mode choice and evaluates its main testable implication using data on foreign investors in Eastern European countries and the successor states of the Soviet Union. The model considers competition between two asymmetric foreign investors and captures the following trade-off: while a joint venture (JV) helps a foreign investor secure a better position in the product market vis-à-vis its rival, it also requires that profits be shared with the local partner. The model predicts that the efficient foreign investor is less likely to choose a JV and more likely to enter directly relative to the inefficient investor. Our empirical analysis supports this prediction: foreign investors with more sophisticated technologies and marketing skills (relative to other firms in their industry) tend to prefer direct entry to JVs. This empirical finding is robust to controlling for host country-specific effects and other commonly cited determinants of entry mode." ("JEL" F13, F23, O32) Copyright (c) 2009 Western Economic Association International.

Suggested Citation

  • Beata S. Javorcik & Kamal Saggi, 2010. "Technological Asymmetry Among Foreign Investors And Mode Of Entry," Economic Inquiry, Western Economic Association International, vol. 48(2), pages 415-433, April.
  • Handle: RePEc:bla:ecinqu:v:48:y:2010:i:2:p:415-433
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    Cited by:

    1. Beata Javorcik & Steven Poelhekke, 2017. "Former Foreign Affiliates: Cast Out and Outperformed?," Journal of the European Economic Association, European Economic Association, vol. 15(3), pages 501-539.
    2. Onur Koska, 2009. "A Model of Competition Between Multinational Firms," Working Papers 0911, University of Otago, Department of Economics, revised Oct 2009.
    3. Federico J. Díez & Alan C. Spearot, 2011. "Core competencies and the structure of foreign direct investment," Working Papers 11-13, Federal Reserve Bank of Boston.
    4. Latzer, Hélène, 2013. "Bridging the technology gap with limited human capital resources," Economic Modelling, Elsevier, vol. 35(C), pages 175-184.
    5. Koska, Onur A., 2014. "A Model of Competition between Multinationals," MPRA Paper 68024, University Library of Munich, Germany.
    6. Wooster, Rossitza B. & Blanco, Luisa & Sawyer, W. Charles, 2016. "Equity commitment under uncertainty: A hierarchical model of real option entry mode choices," International Business Review, Elsevier, vol. 25(1), pages 382-394.
    7. Di Guardo, Maria Chiara & Marrocu, Emanuela & Paci, Raffaele, 2016. "The effect of local corruption on ownership strategy in cross-border mergers and acquisitions," Journal of Business Research, Elsevier, vol. 69(10), pages 4225-4241.
    8. repec:eee:jrpoli:v:52:y:2017:i:c:p:320-326 is not listed on IDEAS
    9. XU, Bin & LU, Jiangyong, 2009. "Foreign direct investment, processing trade, and the sophistication of China's exports," China Economic Review, Elsevier, vol. 20(3), pages 425-439, September.
    10. Jiahua Che & Giovanni Facchini, 2009. "Cultural differences, insecure property rights and the mode of entry decision," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(3), pages 465-484, March.
    11. Girma, Sourafel & Gong, Yundan & Görg, Holger & Lancheros, Sandra, 2015. "Investment liberalisation, technology take-off and export markets entry: Does foreign ownership structure matter?," Journal of Economic Behavior & Organization, Elsevier, vol. 116(C), pages 254-269.
    12. Leahy, Dermot & Naghavi, Alireza, 2006. "Intellectual Property Rights and Entry into a Foreign Market: FDI vs Joint Ventures," CEPR Discussion Papers 5672, C.E.P.R. Discussion Papers.
    13. Charles Sawyer W. & B. Wooster Rossitza & R. Blanco Luisa, 2015. "Does Experience Matter for Patterns of Expansion by US Companies in Latin America and the Caribbean?," Global Economy Journal, De Gruyter, vol. 15(1), pages 1-24, March.
    14. Gattai, Valeria & Natale, Piergiovanna, 2013. "What makes a joint venture: Micro-evidence from Sino-Italian contracts," Review of Financial Economics, Elsevier, vol. 22(4), pages 194-205.
    15. Girma, Sourafel & Gong, Yundan & Görg, Holger & Lancheros, Sandra, 2012. "Foreign ownership structure, technology upgrading and exports: Evidence from Chinese firms," Kiel Working Papers 1793, Kiel Institute for the World Economy (IfW).
    16. Alireza Naghavi & Dermot Leahy, 2008. "Intellectual Property Rights and North-South Joint Ventures," Center for Economic Research (RECent) 017, University of Modena and Reggio E., Dept. of Economics "Marco Biagi".
    17. Kaminski, Bartlomiej & Smarzynska, Beata K., 2001. "Foreign direct investment and integration into global production and distribution networks : the case of Poland," Policy Research Working Paper Series 2646, The World Bank.
    18. Theodore H Moran, 2016. "The Role of Industrial Policy as a Development Tool: New Evidence from the Globalization of Trade-and-Investment," Working Papers id:8423, eSocialSciences.
    19. Po-Lu Chen, 2013. "Modes of Foreign Direct Investment and Intellectual Property Rights Protection: Wholly-owned or Joint Venture? Firm-level Evidence from Taiwanese Multinational Manufacturing Enterprises," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 549-561, August.
    20. Paul Missios & Halis Murat Yildiz & Ida Ferrara, 2009. "Foreign Direct Investment and the Choice of Environmental Policy," Working Papers 004, Ryerson University, Department of Economics.
    21. Charlie Joyez, 2018. "Interaction between firm-level and host-country characteristics and multinationals' integration choices," Working Papers DT/2018/03, DIAL (Développement, Institutions et Mondialisation).

    More about this item

    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, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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