Ownership structures of foreign subsidiaries

Abstract

This paper explains how multinational enterprises (MNEs) select ownership structures for their foreign manufacturing subsidiaries. It extends the literature on the economics of the MNE and provides new statistical tests of its theoretical predictions. MNEs are found to prefer a joint venture with a host-country firm over a wholly owned subsidiary when: (I) the capabilities of the local firm complement those of the MNE; (2) the contributions of both firms are costlier to transfer contractually than through ownership channels, and (3) costs due to shirking by partners and conflicts between them do not outweigh the benefits of joint ownership.