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Cultural differences, insecure property rights and the mode of entry decision

  • Jiahua Che

    ()

  • Giovanni Facchini

    ()

We develop a theory of a multinational corporation's optimal mode of entry in a new market. The foreign firm can choose between a licensing agreement, a wholly owned subsidiary or shared control (joint venture). In an environment in which property rights are insecure, opportunism is possible, and the identification of new business opportunities is costly, we show that the relationship between the quality of the institutional environment and the mode of entry decision is non-monotonic. Licensing is preferred if property rights are strictly enforced, while a joint venture is chosen when property rights are poorly enforced. For intermediate situations, the better use of local knowledge made possible by shared control under a joint venture works as a double-edged sword. On the one hand, it makes the monitoring activity of the multinational more credible, on the other it offers insurance to both parties, potentially compromising the incentives faced by the local partner.

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File URL: http://hdl.handle.net/10.1007/s00199-007-0323-7
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Article provided by Springer in its journal Economic Theory.

Volume (Year): 38 (2009)
Issue (Month): 3 (March)
Pages: 465-484

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Handle: RePEc:spr:joecth:v:38:y:2009:i:3:p:465-484
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  1. Muller, Thomas & Schnitzer, Monika, 2006. "Technology transfer and spillovers in international joint ventures," Journal of International Economics, Elsevier, vol. 68(2), pages 456-468, March.
  2. Antras, Pol & Helpman, Elhanan, 2004. "Global Sourcing," Scholarly Articles 3196327, Harvard University Department of Economics.
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  8. Smarzynska, Beata K., 2002. "The composition of foreign direct investment and protection of intellectual property rights : evidence from transition economies," Policy Research Working Paper Series 2786, The World Bank.
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  10. Ignatius Horstmann & James R. Markusen, 1987. "Licensing versus Direct Investment: A Model of Internalization by the Multinational Enterprise," Canadian Journal of Economics, Canadian Economics Association, vol. 20(3), pages 464-81, August.
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  14. repec:hrv:faseco:4784029 is not listed on IDEAS
  15. Jocelyn Glass, Amy & Saggi, Kamal, 2002. "Licensing versus direct investment: implications for economic growth," Journal of International Economics, Elsevier, vol. 56(1), pages 131-153, January.
  16. Nakamura, M. & Xie, J., 1998. "Nonverifiability, noncontractibility and ownership determination models in foreign direct investment, with an application to foreign operations in Japan," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 571-599, September.
  17. 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.
  18. McCalman, Phillip, 2004. "Foreign direct investment and intellectual property rights: evidence from Hollywood's global distribution of movies and videos," Journal of International Economics, Elsevier, vol. 62(1), pages 107-123, January.
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