Export-Oriented International Joint Venture: Endogenous Set-Up Costs and Information Gathering

30 Pages Posted: 14 Sep 2007

See all articles by Chifeng Dai

Chifeng Dai

Southern Illinois University at Carbondale - Department of Economics

Sajal Lahiri

Southern Illinois University Carbondale - Department of Economics

Date Written: September 12, 2007

Abstract

We analyze the formation of an export-oriented international joint venture (IJV) between a multinational corporation (MNC) and a domestic firm under demand uncertainty and in a principal-agent framework. The MNC possesses a superior production technology and is better at predicting foreign market demand. The domestic firm can reduce set-up costs of the IJV with effort levels that is endogenously determined. We examine how the MNC's preference for, and the ownership structure of, a joint venture depend on the efficiency of information gathering and of cost reduction, and on the nature of credit markets. We find, inter alia, that when the credit constraint is severe the MNC does not push the domestic firm to its reservation profit level. A relaxation of the credit constraint facing the domestic firm never makes it better off and in fact makes the domestic firm worse off when the credit constraint is severe.

Keywords: International joint venture, MNC, demand uncertainty, double-sided moral hazard, set-up costs, exports

JEL Classification: F23, L24, D86

Suggested Citation

Dai, Chifeng and Lahiri, Sajal, Export-Oriented International Joint Venture: Endogenous Set-Up Costs and Information Gathering (September 12, 2007). Available at SSRN: https://ssrn.com/abstract=1014051 or http://dx.doi.org/10.2139/ssrn.1014051

Chifeng Dai

Southern Illinois University at Carbondale - Department of Economics ( email )

Mail Code 4515
Carbondale, IL 62901-4515
United States

Sajal Lahiri (Contact Author)

Southern Illinois University Carbondale - Department of Economics ( email )

MC 415
1000 Faner Drive
Carbondale, IL 62901
United States

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