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Physical Capital, Knowledge Capital and the Choice between FDI and Outsourcing

30 Pages Posted: 18 Dec 2008  

Yongmin Chen

University of Colorado at Boulder - Department of Economics

Ignatius J. Horstmann

University of Toronto - Rotman School of Management; University of Toronto - Institute for Policy Analysis

James R. Markusen

University of Colorado at Boulder - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2008

Abstract

There exist two approaches in the literature concerning the multinational firm's mode choice for foreign production between an owned subsidiary and a licensing contract. One approach considers environments where the firm is transferring primarily knowledge-based assets. An important assumption there is that the relevant knowledge is absorbed by the local manager or licensee over the course of time: knowledge is non-excludable. More recently, a number of influential papers have adopted a property-right view of the firm, assuming the application abroad of physical capital, the owner of which retains full and exclusive rights to the capital should a relationship break down. In this paper we combine both forms of capital assets in a single model. The model predicts that foreign direct investment (owned subsidiaries) is more likely than licensing when the ratio of knowledge capital to physical capital is high, or when market value is high relative to the book value of capital (high Tobin's-Q).

Keywords: FDI, hold-up, knowledge capital, outsourcing, physical capital

JEL Classification: F2, F23, L2, L22, L23

Suggested Citation

Chen, Yongmin and Horstmann, Ignatius J. and Markusen, James R., Physical Capital, Knowledge Capital and the Choice between FDI and Outsourcing (December 2008). CEPR Discussion Paper No. DP7073. Available at SSRN: https://ssrn.com/abstract=1311196

Yongmin Chen

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309-0256
United States
303-492-8736 (Phone)
303-492-8960 (Fax)

Ignatius J. Horstmann

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/ihorstmann

University of Toronto - Institute for Policy Analysis ( email )

140 St. George Street
Toronto, Ontario M5S 3G6
Canada

James R. Markusen (Contact Author)

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309
United States
303-492-0748 (Phone)
303-492-8960 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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