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Optimal Degree of Foreign Ownership under Uncertainty

Çağatay Bircan

No 617, Working Papers from Research Seminar in International Economics, University of Michigan

Abstract: This paper studies the integration strategies of multinational firms in a multiperiod model under incomplete contracts and uncertainty. I incorporate continuous levels of integration to the study of organizational choice in an existing model of foreign direct investment (Antras and Helpman, 2004) and extend the model to a multi-period framework of learning. The joint productivity of the two partners in an integrated firm is unknown initially to both sides and is revealed only after continued joint production. The model gives rise to a nondegenerate distribution of foreign ownership at the firm level and shows that the optimal level of integration rises with the age of the firm. These patterns are supported by detailed plant-level data on share of foreign ownership. The model predicts that the degree of foreign ownership is an increasing function of joint productivity and intra-firm trade should rise over time as a result of increased control by multinationals. I test the implications of my theory with plant-level data from Turkey and find support for the predictions of the model.

Keywords: partial ownership; vertical integration; multinationals; uncertainty (search for similar items in EconPapers)
JEL-codes: D23 F23 L23 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2011-06
New Economics Papers: this item is included in nep-bec
References: Add references at CitEc
Citations: View citations in EconPapers (2)

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http://www.fordschool.umich.edu/rsie/workingpapers/Papers601-625/r617.pdf

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