Technological Asymmetry Among Foreign Investors and Mode of Entry

19 Pages Posted: 29 Mar 2010

See all articles by Beata Smarzynska Javorcik

Beata Smarzynska Javorcik

University of Oxford - Department of Economics; World Bank - Development Research Group (DECRG); Centre for Economic Policy Research (CEPR)

Kamal Saggi

Southern Methodist University (SMU) - Department of Economics

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Abstract

How does the preferred entry mode of foreign investors depend on their technological capability relative to that of their rivals? This article develops a simple model of entry mode choice and evaluates its main testable implication using data on foreign investors in Eastern European countries and the successor states of the Soviet Union. The model considers competition between two asymmetric foreign investors and captures the following trade-off: while a joint venture (JV) helps a foreign investor secure a better position in the product market vis-à-vis its rival, it also requires that profits be shared with the local partner. The model predicts that the efficient foreign investor is less likely to choose a JV and more likely to enter directly relative to the inefficient investor. Our empirical analysis supports this prediction: foreign investors with more sophisticated technologies and marketing skills (relative to other firms in their industry) tend to prefer direct entry to JVs. This empirical finding is robust to controlling for host country–specific effects and other commonly cited determinants of entry mode.

JEL Classification: F13, F23, O32

Suggested Citation

Javorcik, Beata Smarzynska and Saggi, Kamal, Technological Asymmetry Among Foreign Investors and Mode of Entry. Economic Inquiry, Vol. 48, Issue 2, pp. 415-433, April 2010, Available at SSRN: https://ssrn.com/abstract=1578526 or http://dx.doi.org/10.1111/j.1465-7295.2009.00250.x

Beata Smarzynska Javorcik (Contact Author)

University of Oxford - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Kamal Saggi

Southern Methodist University (SMU) - Department of Economics ( email )

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United States
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