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Physical Capital, Knowledge Capital and the Choice Between FDI and Outsourcing

  • Yongmin Chen
  • Ignatius J. Horstmann
  • James R. Markusen

There exist two approaches in the literature concerning the multinational firm's mode choice for foreign production between an owned subsidiary and a licensing contract. One approach considers environments where the firm is transferring primarily knowledge-based assets. An important assumption there is that the relevant knowledge is absorbed by the local manager or licensee over the course of time: knowledge is non-excludable. More recently, a number of influential papers have adopted a property-right view of the firm, assuming the application abroad of physical capital, the owner of which retains full and exclusive rights to the capital should a relationship break down. In this paper we combine both forms of capital assets in a single model. The model predicts that foreign direct investment (owned subsidiaries) is more likely than licensing when the ratio of knowledge capital to physical capital is high, or when market value is high relative to the book value of capital (high Tobin's-Q).

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14515.

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Date of creation: Dec 2008
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Publication status: published as Yongmin Chen & Ignatius J. Horstmann & James R. Markusen, 2012. "Physical capital, knowledge capital, and the choice between FDI and outsourcing," Canadian Journal of Economics, Canadian Economics Association, vol. 45(1), pages 1-15, February.
Handle: RePEc:nbr:nberwo:14515
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  1. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, December.
  2. Morck, R. & Yeung, B., 1991. "Why Investors Value Multinationality," Working Papers 282, Research Seminar in International Economics, University of Michigan.
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  4. Glass, Amy Jocelyn & Saggi, Kamal, 1999. "Multinational firms and technology transfer," Policy Research Working Paper Series 2067, The World Bank.
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  8. Ignatius Horstmann & James R. Markusen, 1987. "Licensing versus Direct Investment: A Model of Internalization by the Multinational Enterprise," Canadian Journal of Economics, Canadian Economics Association, vol. 20(3), pages 464-81, August.
  9. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  10. Pol Antras, 2004. "Incomplete Contracts and the Product Cycle," Econometric Society 2004 North American Summer Meetings 62, Econometric Society.
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  12. Caves,Richard E., 2007. "Multinational Enterprise and Economic Analysis," Cambridge Books, Cambridge University Press, number 9780521860130, November.
  13. Fosfuri, Andrea & Motta, Massimo & Ronde, Thomas, 2001. "Foreign direct investment and spillovers through workers' mobility," Journal of International Economics, Elsevier, vol. 53(1), pages 205-222, February.
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  15. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Caves,Richard E., 2007. "Multinational Enterprise and Economic Analysis," Cambridge Books, Cambridge University Press, number 9780521677530, November.
  17. repec:fth:michin:282 is not listed on IDEAS
  18. Davidson, W H & McFetridge, Donald G, 1984. "International Technology Transactions and the Theory of the Firm," Journal of Industrial Economics, Wiley Blackwell, vol. 32(3), pages 253-64, March.
  19. Edwin Mansfield & Anthony Romeo, 1980. "Technology Transfer to Overseas Subsidiaries by U. S.-Based Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 95(4), pages 737-750.
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