Technological Leadership and Foreign Investors' Choice of Entry Mode

Abstract

Developing country governments tend to favor joint ventures over other forms of foreign direct investment, believing that local participation facilitates the transfer of technology and marketing skills. However, foreign investors who are technological or marketing leaders in their industries are more likely to invest in wholly owned projects than to share ownership. Thus in R&D-intensive sectors joint ventures may offer less potential for transferring technology and marketing techniques than wholly owned subsidiaries.

Developing country governments tend to favor joint ventures over other forms of foreign direct investment, believing that local participation facilitates the transfer of technology and marketing skills. Smarzynska assesses joint ventures' potential for such transfers by comparing the characteristics of foreign investors engaged in joint ventures with those of foreign investors engaged in wholly owned projects in transition economies in the early 1990s.

Unlike the existing literature, Smarzynska focuses on intra-industry differences rather than interindustry differences in R&D and advertising intensity. Empirical analysis shows that foreign investors who are technological or marketing leaders in their industries are more likely to invest in wholly owned projects than to share ownership. This is true in high- and medium-technology sectors but not in industries with low R&D spending.

Smarzynska concludes that it is inappropriate to treat industries as homogeneous in investigating modes of investment. She also suggests that in sectors with high R&D spending joint ventures may present less potential for transfer of technology and marketing techniques than wholly owned subsidiaries.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to study the contribution of trade and foreign direct investment to technology transfer.

Keywords: Multinational enterprises, joint ventures

JEL Classification: F23