Technical Compatibility and the Mode of Foreign Entry Under Network Externalities

NET Institute Working Paper No. 04-05

30 Pages Posted: 15 Nov 2004

See all articles by Mikhail M. Klimenko

Mikhail M. Klimenko

Georgia Institute of Technology - School of Economics

Kamal Saggi

Southern Methodist University (SMU) - Department of Economics

Date Written: October 2004

Abstract

This paper examines the preferences of a foreign firm and a welfare maximizing host country government over two modes of foreign direct investment (FDI): de novo entry by the foreign firm and acquisition of the domestic incumbent. Two crucial features of the model are the presence of network externalities and (endogenously determined) partial incompatibility between the technology of the domestic incumbent and that introduced by the foreign firm. The relative impact of the modes of entry on local welfare is determined by the degree of competition (more intense under de novo entry) and the magnitude of the positive network externality (greater under acquisition). The clash between the foreign firm's equilibrium choice and the local government's ranking of the two modes of entry might be a potential motivation for policy restrictions that limit the degree of foreign ownership.

Keywords: Foreign direct investment, oligopoly, acquisition, network externalities, technology

Suggested Citation

Klimenko, Mikhail M. and Saggi, Kamal, Technical Compatibility and the Mode of Foreign Entry Under Network Externalities (October 2004). NET Institute Working Paper No. 04-05, Available at SSRN: https://ssrn.com/abstract=618461 or http://dx.doi.org/10.2139/ssrn.618461

Mikhail M. Klimenko (Contact Author)

Georgia Institute of Technology - School of Economics ( email )

781 Marietta Street, NW
Atlanta, GA 30332
United States

HOME PAGE: http://www.econ.gatech.edu/docs/klimenko_vita0904.pdf

Kamal Saggi

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

Dallas, TX 75275
United States
214-768-3274 (Phone)
214-768-1821 (Fax)

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