30 Pages Posted: 18 Dec 2008
Date Written: December 2008
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: 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
By Pol Antras
By Kei-mu Yi
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File name: DP7073.
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