Determinants of the foreign equity share of international joint ventures

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Abstract

Due to host government restrictions, a multinational corporation is required to form a joint venture with a local partner rather than set up a wholly owned subsidiary. Both parties to the joint venture simultaneously decide their respective equity shares and the time to exercise an irreversible investment project via Nash-bargaining. Since the multinational corporation has a cost advantage over its local partner, it will therefore hold a share larger than its relative bargaining power. However, if its cost advantage is less significant, uncertainty is greater, or the cost of exercising the investment option is increasing over time at a lower rate, the multinational firm will hold a smaller share and will also be more hesitant as regards exercising the investment option.

Original languageEnglish
Pages (from-to)2261-2275
Number of pages15
JournalJournal of Economic Dynamics and Control
Volume28
Issue number11
DOIs
StatePublished - Oct 2004

Keywords

  • Foreign equity share
  • Joint ventures
  • Nash-bargaining
  • Real options

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