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Foreign direct investment and host country policies: A rationale for using ownership restrictions

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  • Karabay, Bilgehan

Abstract

This paper examines host governments' motivation for restricting ownership shares of multinational firms (MNFs) in foreign direct investment (FDI) projects. An MNF with a productivity advantage is willing to invest in a host country. The host government wants to capture the MNF's surplus yet cannot observe it due to the MNF's private information about its firm-specific advantage. In contrast, a joint venture (JV) partner might observe this surplus depending on its ownership share. The host government can alleviate its informational constraints by using ownership restrictions to force a JV. This calls into question the wisdom of calls for 'liberalizing' FDI flows by the wholesale elimination of domestic JV requirements. We show that the optimal mechanism involves ownership restrictions that decrease as the size of the MNF's firm-specific advantage increases.

Suggested Citation

  • Karabay, Bilgehan, 2010. "Foreign direct investment and host country policies: A rationale for using ownership restrictions," Journal of Development Economics, Elsevier, vol. 93(2), pages 218-225, November.
  • Handle: RePEc:eee:deveco:v:93:y:2010:i:2:p:218-225
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    Cited by:

    1. repec:ris:utmsje:0205 is not listed on IDEAS
    2. repec:ebd:wpaper:157 is not listed on IDEAS
    3. Bilgehan Karabay & Gernot Pulverer & Ewa Weinmüller, 2009. "Foreign Ownership Restrictions: A Numerical Approach," Computational Economics, Springer;Society for Computational Economics, vol. 33(4), pages 361-388, May.
    4. Kaushal Kishore, 2016. "Tax Competition, Policy Competition and the Strategic Use of Policy Restrictions on Foreign Direct Investments," Working Papers 201684, University of Pretoria, Department of Economics.
    5. repec:spr:manint:v:54:y:2014:i:5:d:10.1007_s11575-014-0218-3 is not listed on IDEAS
    6. repec:bla:worlde:v:40:y:2017:i:8:p:1687-1706 is not listed on IDEAS
    7. repec:eee:jrpoli:v:52:y:2017:i:c:p:320-326 is not listed on IDEAS

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