International joint ventures, technology licensing and ownership structure

To enter into a host country market with significant technological distance, a multinational corporation forms a joint venture affiliate with a local partner and collects licensing royalties from the affiliate. Both parties to the joint venture simultaneously decide their respective equity shares and the capital capacity of a continuous investment project via Nash bargaining. Since the multinational corporation receives licensing royalties from its local partner, it will therefore hold a share smaller than its relative bargaining power. In addition, the multinational firm will demand a larger ownership share if the royalty rate is lower, or the repurchase price of capital becomes lower. The joint venture firm will install a higher capital capacity when entering the host-country market if the price either to repurchase or to resell capital becomes higher. This capacity installation decision, however, will not be affected by the licensing royalty rate.