Cross-border Partial Equity Ownership

Tomohiro Ara, Arghya Ghosh, Hodaka Morita and Hiroshi Mukunoki

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: Firms often form a cross-border alliance by partially owning the equity. When and why do firms have cross-border partial equity ownership (PEO)? Under which conditions should a government give approval for firms to form such PEO? To address the questions, this paper develops an international oligopoly model where one foreign firm forms cross-border PEO with one home firm. PEO helps firms adjust production by avoiding trade costs but decreases market competition inducing a rival firm to take aggressive actions. We find that when cost differences between cross-border alliance firms are moderate, they choose PEO in order to shift the output between them most effectively while alleviating a rival firm's aggressive actions. However, a government should ban this PEO from the viewpoint of welfare, since the negative effect of weakened competition dominates the positive effect of output shifting: only when cost differences are large, should a government approve cross-border PEO.

Pages: 30 pages
Date: 2025-03
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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:25026

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