Foreign direct investment, joint ventures and export

After a joint venture agreement with a high-income country’s firm, an export-oriented but technologically backward firm in a low-income country may earn higher profit, but may not be able to improve its export market performance, unless the world market size is large. In a two-firm-two-country model, the export performance of a low-income country’s firm may suffer in a joint venture, or if the high income country’s firm plays a leadership game. However, the high-income country’s firm may prefer a joint venture to a leadership game if the profit share of the low-income country’s firm can be restricted. Under certain conditions, the low-income country’s firm should compete with the high income country’s firm and use various market signals to improve its credibility in the world market. A general model with ‘n’ firms of ‘n’ low-income countries forming a global joint venture with one firm of a high income country, shows that, the joint venture is feasible only if there are no more than three technologically backward firms and that it may be possible for a single firm of a low-income country to meet the export clause imposed by its government.