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.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.bos.frb.org/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Javorcik, Beata Smarzynska & Saggi, Kamal, 2004.
"Technological asymmetry among foreign investors and mode of entry,"
Policy Research Working Paper Series
3196, The World Bank.
- 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.
- Grossman, Gene & Helpman, Elhanan, 2002.
"Outsourcing in a Global Economy,"
CEPR Discussion Papers
3165, C.E.P.R. Discussion Papers.
- 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," NBER Working Papers 8728, National Bureau of Economic Research, Inc.
- 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..
- Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy?," Harvard Institute of Economic Research Working Papers 1966, Harvard - Institute of Economic Research.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:fip:fedbwp:11-13. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio)
If references are entirely missing, you can add them using this form.