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Cultural Differences, Insecure Property Rights and the Mode of Entry Decision

Che, Jiahua and Facchi, Giovanni (2007) Cultural Differences, Insecure Property Rights and the Mode of Entry Decision. Working Paper. University of Essex, Department of Economics, Economics Discussion Papers, Colchester.

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Abstract

We develop a theory of a multinational corporation's optimal mode of entry in a new market. The foreign firm can choose between a licensing agreement, a wholly owned subsidiary or shared control (joint venture). In an environment in which property rights are insecure, opportunism is possible, and the identification of new business opportunities is costly, we show that the relationship between the quality of the institutional environment and the mode of entry decision is non-monotonic. Licensing is preferred if property rights are strictly enforced, while a joint venture is chosen when property rights are poorly enforced. For intermediate situations, the better use of local knowledge made possible by shared control under a joint venture works as a double edged sword. On the one hand, it makes the monitoring activity of the multinational more credible, on the other it offers insurance to both parties, potentially compromising the incentives faced by the local partner.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Multinational Corporations, Mode of entry decision, Joint Ventures.
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jenny Connolly
Date Deposited: 28 Aug 2014 11:42
Last Modified: 28 Aug 2014 11:42
URI: http://repository.essex.ac.uk/id/eprint/8916

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