A theoretical and empirical invesigation of the multinational firm's choice of entry mode

This dissertation provides a theoretical and empirical investigation of the multinational firm's choice of entry mode. In chapter I, we build a theoretical model that shows that a joint venture is an important organizational form for a multinational firm, although the multinational firm cannot make ex ante complete contracts with its intermediate-input supplier. We show that if the supplier's intermediate input is important, then the multinational firm holds a smaller share of supplier firm's equity to give the supplier an incentive to produce more intermediate input. However, if the multinational firm makes an important intermediate input, then the firm tends to hold a greater equity share. That is, depending on the relative importance of the intermediate inputs, the multinational firm chooses its share of the supplier firm's equity. To test the predictions in the theory, we use a unique data set of a newly industrialized country's (South Korea) multinational firms. The empirical tests partially support the theory. The empirics show that if an affiliate has the higher ratio of intangible assets to sales, then its parent firm is inclined to hold a smaller equity share of supplier's firm.; Chapter II studies how the differences in a host country's intellectual property rights protection affect the multinational firm's decision concerning ownership structure. Using another South Korean firm-level data set, we find that there is a strong negative relationship between host country's standards of intellectual property rights protection and multinational firm's equity participation in its affiliate. The evidence is found by using two different samples: (1) a sample of all overseas affiliates, and (2) a sample including only partially-owned affiliates. In addition, we find that a multinational firm prefers joint ownership when it invests in the resources-based sector. However, we cannot find any strong evidence that a multinational firm lowers its equity share of overseas affiliate when the host country market is more competitive.; Chapter III examines the effects of contract enforceability and market structures on the multinational firm's choice between licensing and foreign direct investment. Apparently, the multinational firm's choice affects the host country's social welfare. Thus, the host country is likely to use various policy instruments such as direct restrictions, direct subsidies, and contract enforceability to induce the multinational firm to choose a desirable entry mode. The model shows that the host country's preference for the multinational firm's entry mode crucially depends on the host country's market structures and the country's capability to absorb the firm's advanced technology. Under certain conditions, direct subsidies to encourage foreign direct investment can benefit both the host country and the multinational firm. One interesting result is that the host country never chooses perfect contract enforceability when the country has one incumbent company that can compete with the multinational firm.