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Foreign ownership, international joint ventures and strategic investment

Sawada, Yukiko (2018): Foreign ownership, international joint ventures and strategic investment.

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Abstract

We investigate the strategic relationship between a foreign firm and a local firm in an international joint venture (IJV). We develop a simple partial equilibrium model in which a local firm invests in skills, which affects the productivity of the IJV, and the foreign firm decides whether to implement an IJV or not. In equilibrium, foreign ownership is a key factor that determines the investment level and the foreign firm's strategy. If foreign ownership is too low or too high, the foreign firm cannot induce the local partner to invest in skills, a situation that provides the lowest payoff for both agents. If it is at a medium level, the local partner invests in management skill and the foreign firm chooses the IJV strategy. In this case, both agents receive a higher payoff.

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