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Foreign direct investment and host country policies: A rationale for using ownership restrictions

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  • Karabay, Bilgehan

Abstract

This paper examines host governments' motivation for restricting ownership shares of multinational firms (MNFs) in foreign direct investment (FDI) projects. An MNF with a productivity advantage is willing to invest in a host country. The host government wants to capture the MNF's surplus yet cannot observe it due to the MNF's private information about its firm-specific advantage. In contrast, a joint venture (JV) partner might observe this surplus depending on its ownership share. The host government can alleviate its informational constraints by using ownership restrictions to force a JV. This calls into question the wisdom of calls for 'liberalizing' FDI flows by the wholesale elimination of domestic JV requirements. We show that the optimal mechanism involves ownership restrictions that decrease as the size of the MNF's firm-specific advantage increases.

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  • Karabay, Bilgehan, 2010. "Foreign direct investment and host country policies: A rationale for using ownership restrictions," Journal of Development Economics, Elsevier, vol. 93(2), pages 218-225, November.
    • Handle: RePEc:eee:deveco:v:93:y:2010:i:2:p:218-225
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    6. Xia Jun & Marshall S. Jiang & Sali Li & Preet S. Aulakh, 2014. "Practice Standardization in Cross-Border Activities of Multinational Corporations: A Resource Dependence Perspective," Management International Review, Springer, vol. 54(5), pages 707-734, October.
    7. Ghebrihiwet, Nahom & Motchenkova, Evgenia, 2017. "Relationship between FDI, foreign ownership restrictions, and technology transfer in the resources sector: A derivation approach," Resources Policy, Elsevier, vol. 52(C), pages 320-326.
    8. Cagatay Bircan, 2013. "Foreign direct investment and wages: does the level of ownership matter?," Working Papers 157, European Bank for Reconstruction and Development, Office of the Chief Economist.
    9. Bilgehan Karabay & Gernot Pulverer & Ewa Weinmüller, 2009. "Foreign Ownership Restrictions: A Numerical Approach," Computational Economics, Springer;Society for Computational Economics, vol. 33(4), pages 361-388, May.
    10. Kaushal Kishore, 2016. "Tax Competition, Policy Competition and the Strategic Use of Policy Restrictions on Foreign Direct Investments," Working Papers 201684, University of Pretoria, Department of Economics.
    11. Bilgehan Karabay, 2017. "Optimal Regulation of Multinationals under Collusion," The World Economy, Wiley Blackwell, vol. 40(8), pages 1687-1706, August.
    12. Gustafsson, Robin & Aalto, Eero, 2020. "Inward Foreign Direct Investment Promotion – A Review of Policy Rationales and Impacts," ETLA Reports 103, The Research Institute of the Finnish Economy.

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