Joint Ventures versus Fully Owned Subsidiaries: Multinational Strategies in Liberalizing Economies

Abstract

As ceilings on foreign shareholdings are withdrawn during liberalization, multinationals enter through fully owned subsidiaries that compete with their own joint ventures, unless local partners permit them to raise their stakes. In a framework of quantity competition, this paper demonstrates that an entry threat is more credible when joint venture investment is reversible, the units are independently managed and the local stake is high. Further, profitability of horizontal merger between the units encourages a share reallocation, while its absence favours a new subsidiary. Under irreversible investment, the threat is less credible and both share reallocations or new subsidiaries are less likely.

Joint Venture Buy-Outs Under Uncertainty*

“…Further, there is no cost of share adjustment. Hence, higher shareholding over time helps the foreign firm to increase its future profits and may encourage it to start a JV with a relatively small 8 If the firms cannot write a contract on future shareholdings, the foreign firm may still increase its JV shareholding by using the threat of opening up a fully owned subsidiary (Mukherjee and Sengupta [2001]; Marjit and Roy Chowdhury [2004]). Since we are concerned about the effect of future share adjustment, rather than explaining the way share adjustment takes place, we avoid this complication by assuming that the firms write contracts on future shareholdings.…”

“…Our focus on demand uncertainty as a rationale for JV instability is different from the existing literature, which has shown many reasons for JV instability, including cultural differences between the JV partners (Kabiraj et al [2005]); product market competition (Kabiraj [1999], Mukherjee and Sengupta [2001], Marjit and Roy Chowdhury [2004]); sequential economic liberalization, innovation, imitation and private information about market demand (Sinha [2001a, b], Sinha [2008]); availability of a new technology to the foreign JV partner (Kabiraj and Roy Chowdhury [2008]); and cost differences between the firms (Banerjee and Mukherjee [2006]). In contrast, in our analysis the forward looking behaviour of the foreign firm under demand uncertainty plays an important role for JV formation and its subsequent breakdown.…”

Des firmes multinationales : un survol de la littérature microéconomique

“…il peut évoluer notamment après une modification de la législation lorsque le partenariat a été conclu essentiellement pour satisfaire à des obligations légales. Mukherjee et sengupta (2001) étudient la stratégie d'une FMn engagée dans une JV avec une firme locale après la libéralisation des investissements dans le pays d'accueil. La libéralisation supprime le plafond imposé à la participation d'une FMn dans la JV.…”

Asymmetric capacity costs and joint venture buy-outs

“…Among the other papers Mukherji and Sengupta (2001), Sinha (2001) study the impact of a sequential liberalization process on joint venture breakdown. While Sinha studies a model with informational asymmetries, Mukherji and Sengupta examine the effects of different degrees of competition, as well as different modes of control on joint venture instability.…”