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Optimal Degree of Foreign Ownership under Uncertainty

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  • Bircan, Çağatay

    (University of Michigan)

Abstract

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.

Suggested Citation

  • Bircan, Çağatay, 2011. "Optimal Degree of Foreign Ownership under Uncertainty," Working Papers 617, Research Seminar in International Economics, University of Michigan.
  • Handle: RePEc:mie:wpaper:617
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    File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers601-625/r617.pdf
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    References listed on IDEAS

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    1. 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.
    2. Sjoholm, Fredrik & Lipsey, Robert E, 2006. "Foreign Firms and Indonesian Manufacturing Wages: An Analysis with Panel Data," Economic Development and Cultural Change, University of Chicago Press, vol. 55(1), pages 201-221, October.
    3. 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.
    4. 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 679-685, May.
    5. Benfratello, Luigi & Sembenelli, Alessandro, 2006. "Foreign ownership and productivity: Is the direction of causality so obvious?," International Journal of Industrial Organization, Elsevier, vol. 24(4), pages 733-751, July.
    6. Özler, Sule & Taymaz, Erol & YIlmaz, Kamil, 2009. "History Matters for the Export Decision: Plant-Level Evidence from Turkish Manufacturing Industry," World Development, Elsevier, vol. 37(2), pages 479-488, February.
    7. 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.
    8. 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.
    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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    Cited by:

    1. Federico J. Díez & Alan C. Spearot, 2012. "Core competencies, matching, and the structure of foreign direct investment: an update," Working Papers 12-8, Federal Reserve Bank of Boston.

    More about this item

    Keywords

    partial ownership; vertical integration; multinationals; uncertainty;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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