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Technological asymmetry among foreign investors and mode of entry

  • Javorcik, Beata Smarzynska
  • Saggi, Kamal

How does the preferred entry mode of foreign investors depend on their technological capability relative to that of their rivals? The authors develop a simple model of entry mode choice and evaluate its main testable implication using data on foreign investors in Eastern European countries and the successor states of the former Soviet Union. The model considers competition between two asymmetric foreign investors and captures the following tradeoffs: while a joint venture helps a foreign investor secure a better position in the product market compared with its rival, it also requires that profits be shared with the local partner. The model predicts that the efficient foreign investor is less likely to choose a joint venture and more likely to enter directly relative to the inefficient investor. The authors'empirical analysis supports this prediction: foreign investors with more sophisticated technologies and marketing skills (relative to other firms in their industry) tend to prefer direct entry to joint ventures. This empirical finding is robust to controlling for host country-specific effects and other commonly cited determinants of entry mode.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3196.

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Date of creation: 01 Jan 2004
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Handle: RePEc:wbk:wbrwps:3196
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  1. Ethier, W.J. & Markusen, J.R., 1993. "Multinational Firms, Technology Diffusion and Trade," ISER Discussion Paper 0303, Institute of Social and Economic Research, Osaka University.
  2. Bruce Kogut & Harbir Singh, 1988. "The Effect of National Culture on the Choice of Entry Mode," Journal of International Business Studies, Palgrave Macmillan, vol. 19(3), pages 411-432, September.
  3. Gomes-Casseres, Benjamin, 1989. "Ownership structures of foreign subsidiaries : Theory and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 11(1), pages 1-25, January.
  4. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
  5. Markusen, James R., 2001. "Contracts, intellectual property rights, and multinational investment in developing countries," Journal of International Economics, Elsevier, vol. 53(1), pages 189-204, February.
  6. Magnus Blomstrom & Mario Zejan, 1989. "Why Do Multinational Firms Seek Out Joint Ventures?," NBER Working Papers 2987, National Bureau of Economic Research, Inc.
  7. Miller, R-R & Glen, J-D & Jaspersen, F-Z & Karmokolias, Y, 1996. "International Joint Ventures in Developing Countries. Happy Marriages?," Papers 29, World Bank - International Finance Corporation.
  8. Elizabeth Asiedu & Hadi Salehi Esfahani, 2001. "Ownership Structure In Foreign Direct Investment Projects," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 647-662, November.
  9. Ramachandran, Vijaya, 1993. "Technology Transfer, Firm Ownership, and Investment in Human Capital," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 664-70, November.
  10. Benjamin Gomes-Casseres, 1990. "Firm Ownership Preferences and Host Government Restrictions: An Integrated Approach," Journal of International Business Studies, Palgrave Macmillan, vol. 21(1), pages 1-22, March.
  11. 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.
  12. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
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