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Technical Compatibility and the Mode of Foreign Entry under Network Externalities

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This paper examines the preferences of a foreign firm and a welfare-maximizing host country government over two modes of foreign direct investment (FDI): de novo entry by the foreign firm and acquisition of the domestic incumbent. Two crucial features of the model are the presence of network externalities and (endogenously determined) partial incompatibility between the technology of the domestic incumbent and that introduced by the foreign firm. The relative impact of the modes of entry on local welfare is determined by the degree of competition (more intense under de novo entry) and the magnitude of the positive network externality (greater under acquisition). The clash between the foreign firm’s equilibrium choice and the local government’s ranking of the two modes of entry might be a potential motivation for policy restrictions that limit the degree of foreign ownership.

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  • Mikhail Klimenko & Kamal Saggi, 2004. "Technical Compatibility and the Mode of Foreign Entry under Network Externalities," Working Papers 04-05, NET Institute, revised Oct 2004.
    • Handle: RePEc:net:wpaper:0405
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    More about this item

    Keywords

    Foreign Direct Investment; Oligopoly; Acquisition; Network Externalities; Technology Transfer; Technical Compatibility;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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