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Mode of Entry and Expropriation

Author

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  • Dadasov, Ramin
  • Lorz, Jens Oliver

Abstract

We develop a politico-economic model to analyze the relationship between mode of entry into a new market and institutional quality of the host country. A foreign investor can either purchase a domestic firm, what we consider as FDI, or form a joint venture, in which the control right over the firm rests with the domestic entrepreneur. In an autocratic regime, the ruling elite uses its political power to implement expropriatory policies. In an integrated firm the risk of expropriation targets the foreign investor whereas in a joint venture the domestic agent bears this risk. We determine the equilibrium level of the probability of expropriation and show that the ruling elite, by choosing it, discriminates in favor of the foreign investor. This has implications for the form of invested capital, and thus for the organizational structure of active firms in the host country.

Suggested Citation

  • Dadasov, Ramin & Lorz, Jens Oliver, 2010. "Mode of Entry and Expropriation," Proceedings of the German Development Economics Conference, Hannover 2010 27, Verein für Socialpolitik, Research Committee Development Economics.
  • Handle: RePEc:zbw:gdec10:27
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    Keywords

    Foreign direct investments; joint ventures; property rights; expropriation;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • P48 - Economic Systems - - Other Economic Systems - - - Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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