Ownership and R&D Intensity in Foreign Affiliates under Incomplete Capital Markets

Abstract

Whereas international joint venture is a dominated strategy in the property rights theory of the firm, this article shows that it can be optimal in the presence of contractual and financial frictions. We use the data of Chinese foreign affiliates to test and support our key theoretical result that joint ventures are in general more R&D intensive than wholly foreign-owned enterprises and this result is reinforced in financially more vulnerable industries. Furthermore, when wealth constraints loosen, the share of joint venture in foreign affiliates is also likely to decrease and decrease more in financially more vulnerable industries.

Keywords: Financial Frictions; Incomplete Contracts; Joint Ventures; Outsourcing; Vertical integration; R&D Intensity

JEL Classification: F14, F23, F36, G32