Foreign Direct Investment For Sale

Abstract

This study examines the choice of a multinational firm between two alternative entry modes, a green field investment and a joint venture, under incomplete information. The joint venture partner is selected by an auction, which distinguishes this study from other studies in the literature. A private values auction allows a multinational firm to increase its share of the joint venture profit so that a joint venture is always preferable to green field investment. The model also examines the nationally optimal entry mode and finds that green field investment is likely to reduce welfare. The anticipated welfare implications of a joint venture crucially depend on the expectation of the marginal cost of the joint venture. Relative to a green field investment, a joint venture is welfare-improving if the negative impact of a joint venture on a local rival's pro fit is small.