The Role of Knowhow Acquisition in the Formation and Duration of Joint Ventures

Abstract

We analyze the role of knowhow acquisition in the formation and duration of joint ventures. Two parties become partners in a joint venture in order to benefit from each other's knowhow. Joint operations in the joint venture provide each party with the opportunity to acquire part of its partner's knowhow. A party's increased knowhow provides the impetus for the dissolution of the joint venture, as it decreases the need for the partner's knowhow. Dissolution takes the form of the buy out of one partner by the other. We characterize the conditions under which such dissolution takes place, identify the party that buys out its partner, determine the time to dissolution, establish its comparative statics, and examine the implications of knowledge acquisition for the desirability of joint venture formation.

Keywords: Joint Ventures, Knowhow Acquisition, Optimal Dissolution Time, Continuous-Time Corporate Finance.

JEL Classification: G34