Technological Asymmetry Among Foreign Investors and Mode of Entry
38 Pages Posted: 11 Aug 2003
Date Written: July 22, 2003
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: Suggested Citation