Technological Asymmetry Among Foreign Investors and Mode of Entry

38 Pages Posted: 11 Aug 2003

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 22, 2003

Abstract

How does the preferred entry mode of foreign investors depend upon their technological capability relative to that of their rivals? This paper develops a simple duopoly model of 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 theoretical model captures the following intuitive trade-off: while a joint venture (JV) can help a foreign investor secure a better position in the product market vis-a-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. 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 joint ventures. This empirical finding is robust to controlling for host country specific effects and other commonly cited determinants of entry mode.

Keywords: Foreign Direct Investment, Joint Ventures, Technology

JEL Classification: F13, F23, O32

Suggested Citation

Javorcik, Beata Smarzynska and Saggi, Kamal, Technological Asymmetry Among Foreign Investors and Mode of Entry (July 22, 2003). Available at SSRN: https://ssrn.com/abstract=428220

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 )

Dallas, TX 75275
United States
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214-768-1821 (Fax)

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