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Direct Foreign Investment Versus Licensing

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  • Satya P. Das

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.

Suggested Citation

  • Satya P. Das, 1999. "Direct Foreign Investment Versus Licensing," Review of Development Economics, Wiley Blackwell, vol. 3(1), pages 86-97, February.
    • Handle: RePEc:bla:rdevec:v:3:y:1999:i:1:p:86-97
    DOI: 10.1111/1467-9361.00053
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    Cited by:

    1. Frank Stähler, 2014. "Partial ownership and cross-border mergers," Journal of Economics, Springer, vol. 111(3), pages 209-237, April.
    2. Eberhard Feess & Michael Hoeck & Oliver Lorz, 2009. "International Technology Transfers and Competition," Review of International Economics, Wiley Blackwell, vol. 17(5), pages 1038-1052, November.
    3. Roy Chowdhury, Prabal & Roy Chowdhury, Indrani, 2001. "Joint venture instability: a life cycle approach," MPRA Paper 1556, University Library of Munich, Germany, revised Jan 2007.
    4. Rosa Forte & António Brandão, 2008. "Effects of Adverse Selection on a Multinational Firm’s Decision on where to Subcontract," Journal of Industry, Competition and Trade, Springer, vol. 8(2), pages 133-146, June.
    5. Rosete, Alfredo, 2016. "Property, Possession, Incorporation: Another Look at Agribusiness Venture Agreements in the Philippines," UMASS Amherst Economics Working Papers 2016-09, University of Massachusetts Amherst, Department of Economics.
    6. Leahy, Dermot & Naghavi, Alireza, 2006. "Intellectual Property Rights and Entry into a Foreign Market: FDI vs Joint Ventures," CEPR Discussion Papers 5672, C.E.P.R. Discussion Papers.
    7. Marjit, Sugata & Mukherjee, Arijit & Kabiraj, Tarun, 2004. "Future technology, incomplete information and international joint venture," Research in Economics, Elsevier, vol. 58(3), pages 219-234, September.
    8. Dermot Leahy & Alireza Naghavi, 2010. "Intellectual Property Rights and Entry into a Foreign Market: FDI versus Joint Ventures," Review of International Economics, Wiley Blackwell, vol. 18(4), pages 633-649, September.
    9. Alireza Naghavi & Dermot Leahy, 2008. "Intellectual Property Rights and North-South Joint Ventures," Center for Economic Research (RECent) 017, University of Modena and Reggio E., Dept. of Economics "Marco Biagi".
    10. Prabal Roy Chowdhury, 2003. "Joint venture instability and monitoring," Discussion Papers 04-09, Indian Statistical Institute, Delhi.
    11. Sinha, Uday Bhanu, 2008. "International joint venture: Buy-out and subsidiary," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 734-756, March.

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