Capital Market Imperfections and Forms of Foreign Operations

We develop a model of foreign operations to determine a parent firm’s choice between wholly owned subsidiaries and joint ventures (and the degree of equity participation in the latter case). We introduce capital market imperfections into the model to capture a positive effect of the firm’s net worth on investment; this effect plays an important role in determining organization forms because the investment level affects the optimal form, which determines technology transfer. We show that parent firms with strong technological advantages can be controlling shareholders even if they take minority positions in ventures with local firms. keywords: foreign direct investment; joint ventures; technology transfer; ownership share; capital market imperfections JEL classification: F23; G32; L22 ∗Hidefumi Kasuga, Graduate School of International Cultural Studies, Tohoku University, Kawauchi, Aoba-ku, Sendai 980-8576, Japan, Phone/Fax:+81 22 217 7615 E-mail address: [email protected]