Direct Foreign Investment Versus Licensing

Satya Das ()

Review of Development Economics, 1999, vol. 3, issue 1, 86-97

Abstract: This paper examines the choice among alternative modes of direct foreign investment, namely, the wholly owned subsidiary (the S option) and joint venture (the J option), vis‐à‐vis licensing (the L option). The focus is on the role of moral hazard, difference in risk attitude and the prospect of the host country’s policy toward the venture. An apparently surprising result is that riskiness of the project is a factor against the J option. Moreover, in the absence of policy intervention, L is dominated by either S or J, whereas if there is an anticipation of policy intervention (i.e., there is a policy moral hazard) L may emerge as the best option.

Date: 1999
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