Implicit Protectionism via State Enterprises and Technology Transfer from Foreign Enterprises

We formulate a mixed triopoly in which one state enterprise competes with one domestic and one foreign private enterprise. The private enterprise can transfer its technology to the private rival, which reduces the rival's production cost. We show that if the privatization policy is endogenous, the foreign firm voluntary transfers its technology, even without fees. We also show that the domestic private firm does not transfer its technology to the foreign firm. Consequently, the domestic private enterprise extracts rents from the foreign enterprise and increases its market share. We also show that the foreign enterprise may strategically raise its local ownership share, which implies that the existence of a state enterprise and its potential future privatization serve as an industrial policy that improves the domestic firm's competitive advantage relative to the foreign enterprise or the implicit foreign ownership regulation.