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Cultural Differences, Insecure Property Rights and the Mode of Entry Decision

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  • Che, Jiahua
  • Facchi, Giovanni

Abstract

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.

Suggested Citation

  • Che, Jiahua & Facchi, Giovanni, 2007. "Cultural Differences, Insecure Property Rights and the Mode of Entry Decision," Economics Discussion Papers 8916, University of Essex, Department of Economics.
  • Handle: RePEc:esx:essedp:8916
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    File URL: http://repository.essex.ac.uk/8916/
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    References listed on IDEAS

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    13. 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.
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    15. repec:hrv:faseco:4784029 is not listed on IDEAS
    16. Smith, Pamela J., 2001. "How do foreign patent rights affect U.S. exports, affiliate sales, and licenses?," Journal of International Economics, Elsevier, pages 411-439.
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