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Optimal Degree of Foreign Ownership under Uncertainty

  • Bircan, Çağatay

    (University of Michigan)

This paper studies the integration strategies of multinational firms in a multiperiod model under incomplete contracts and uncertainty. I incorporate continuous levels of integration to the study of organizational choice in an existing model of foreign direct investment (Antras and Helpman, 2004) and extend the model to a multi-period framework of learning. The joint productivity of the two partners in an integrated firm is unknown initially to both sides and is revealed only after continued joint production. The model gives rise to a nondegenerate distribution of foreign ownership at the firm level and shows that the optimal level of integration rises with the age of the firm. These patterns are supported by detailed plant-level data on share of foreign ownership. The model predicts that the degree of foreign ownership is an increasing function of joint productivity and intra-firm trade should rise over time as a result of increased control by multinationals. I test the implications of my theory with plant-level data from Turkey and find support for the predictions of the model.

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File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers601-625/r617.pdf
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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 617.

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Length: 59 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:mie:wpaper:617
Contact details of provider: Postal: ANN ARBOR MICHIGAN 48109
Web page: http://fordschool.umich.edu/rsie/

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  1. Matthias Arnold, Jens & Javorcik, Beata S., 2009. "Gifted kids or pushy parents? Foreign direct investment and plant productivity in Indonesia," Journal of International Economics, Elsevier, vol. 79(1), pages 42-53, September.
  2. Sule Ozler & Erol Taymaz & Kamil Yilmaz, 2007. "History Matters for the Export Decision Plant Level Evidence from Turkish Manufacturing Industry," ERC Working Papers 0704, ERC - Economic Research Center, Middle East Technical University, revised Mar 2007.
  3. Gregory Corcos & Delphine M. Irac & Giordano Mion & Thierry Verdier, 2008. "The Determinants of Intra-Firm Trade," Development Working Papers 267, Centro Studi Luca d\'Agliano, University of Milano.
  4. Luigi Benfratello & Alessandro Sembenelli, 2002. "Foreign Ownership and Productivity: is the Direction of Causality so Obvious?," Development Working Papers 166, Centro Studi Luca d\'Agliano, University of Milano.
  5. Anusha Chari & Paige P. Ouimet & Linda L. Tesar, 2010. "The Value of Control in Emerging Markets," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1741-1770, April.
  6. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-85, May.
  7. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, vol. 89(3), pages 605-618, June.
  8. Fredrik Sjöholm & Robert E. Lipsey, 2006. "Foreign Firms and Indonesian Manufacturing Wages: An Analysis with Panel Data," Economic Development and Cultural Change, University of Chicago Press, vol. 55, pages 201-221.
  9. Barbosa, Natalia & Louri, Helen, 2002. "On the determinants of multinationals' ownership preferences: evidence from Greece and Portugal," International Journal of Industrial Organization, Elsevier, vol. 20(4), pages 493-515, April.
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