Core competencies and the structure of foreign direct investment
We develop a matching model of foreign direct investment to study how multinational firms choose between greenfield investment, acquisitions, and joint ventures. For all entry modes, firms must invest in a continuum of tasks to bring a product to market. Each firm possesses a core competency in the task space, though firms are otherwise identical. For acquisitions and joint ventures, a multinational enterprise (MNE) must match with a local partner, where the local partner may provide complementary expertise within the task space. However, for joint ventures, investment in tasks is shared by multiple owners, and hence is subject to a holdup problem. In equilibrium, ex-ante identical multinational enter the local matching market, and ex post, three different types of ownership within a heterogeneous group of firms arise. Specifically, the worst matches dissolve and the MNEs invest greenfield, the middle matches form joint ventures, and the best matches integrate via mergers and acquisitions. We also show that joint ventures are more common when the host country produces products that are inferior to those produced in the source country, which explains why MNEs use joint ventures more frequently in less-developed countries. Finally, we extend the model to a simple two-period context to provide a rationale for one of the more salient features of joint ventures, namely, their instability.
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- Raff, Horst & Ryan, Michael & Stähler, Frank, 2009.
"The choice of market entry mode: Greenfield investment, M&A and joint venture,"
International Review of Economics & Finance,
Elsevier, vol. 18(1), pages 3-10, January.
- Stähler, Frank & Ryan, Michael & Raff, Horst, 2007. "The Choice of Market Entry Mode: Greenfield Investment, M&A and Joint Venture," Economics Working Papers 2007-19, Christian-Albrechts-University of Kiel, Department of Economics.
- Gene M. Grossman & Elhanan Helpman, 2005. "Outsourcing in a Global Economy," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 135-159.
- Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy," Working Papers 149, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics.
- Grossman, Gene M. & Helpman, Elhanan, 2005. "Outsourcing in a Global Economy," Scholarly Articles 25586654, Harvard University Department of Economics.
- Grossman, G.M. & Helpman, E., 2002. "Outsourcing in a Global Economy," Papers 218, Princeton, Woodrow Wilson School - Public and International Affairs.
- Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy?," Harvard Institute of Economic Research Working Papers 1966, Harvard - Institute of Economic Research.
- Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy," NBER Working Papers 8728, National Bureau of Economic Research, Inc.
- Grossman, Gene & Helpman, Elhanan, 2002. "Outsourcing in a Global Economy," CEPR Discussion Papers 3165, C.E.P.R. Discussion Papers.
- Sinha, Uday Bhanu, 2001. "International joint venture, licensing and buy-out under asymmetric information," Journal of Development Economics, Elsevier, vol. 66(1), pages 127-151, October.
- 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, 04.
- Javorcik, Beata Smarzynska & Saggi, Kamal, 2004. "Technological asymmetry among foreign investors and mode of entry," Policy Research Working Paper Series 3196, The World Bank.
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