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Temporary Partnerships as an Information Transmission Mechanism: Foreign Investment in Emerging Markets

Author

Listed:
  • H. Peter Møllgaard

    (Copenhagen Business School)

  • Per Baltzer Overgaard

    (University of Aarhus)

Abstract

Asymmetric inforation and fear of acquiring a “lemon” may explain the paucity of foreign investment in emerging market economies. If investors are uncertain about the profitability of investments, intrinsically inefficient, temporary partnerships or joint ventures may serve as mechanisms through which information is transmitted. Temporary partnerships with joint investments by the domestic firm and the foreign investor, together with a buy-out option to the investor, can be used to separate good and bad investment prospects in equilibrium. However, non-revealing equilibria may exist. Implications for foreign direct investment are traced and briefly related to the experience of transition economies.

Suggested Citation

  • H. Peter Møllgaard & Per Baltzer Overgaard, 1998. "Temporary Partnerships as an Information Transmission Mechanism: Foreign Investment in Emerging Markets," CIE Discussion Papers 1998-13, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  • Handle: RePEc:kud:kuieci:1998-13
    as

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    More about this item

    Keywords

    investment; complementary assets; partnerships; joint ventures and licensing; costly signaling;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • F2 - International Economics - - International Factor Movements and International Business
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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