A joint venture is a mechanism for uniting complementary assets owned by separate houses. These assets can be touchable. such as machinery and equipment. or intangible. such as technological know-how. production or selling accomplishments. trade name names. and market-specific information. In an equity articulation venture the spouse houses transfer all or portion of their assets to a lawfully independent entity and portion the net incomes from the venture. Contractual agreements that do non affect shared equity control are sometimes referred to as non-equity joint ventures ; illustrations include licensing and direction contracts. every bit good as supply and distribution understandings. Shared ownership and contractual agreements are besides often grouped together under the term “alliances” . In what follows the focal point will be on equity joint ventures. specifically international joint ventures affecting spouses from different states. From a universe economic system position there are at least two grounds for analyzing international joint ventures.
First. international joint ventures represent a signifier of foreign direct investing ( FDI ) . Multinational endeavors frequently have to make up one’s mind whether to entirely have a foreign affiliate or to portion equity control with a local spouse. This determination is a cardinal component of the foreign investing scheme. Second. the ownership construction of a foreign-investment undertaking affects host state public assistance. A direct consequence comes from the sharing of net incomes between the transnational and the local house. Indirect effects arise because ownership influences investors’ inducements to perpetrate resources to the undertaking. such as capital and engineering. Some host states impose local ownership demands that limit the equity interest foreign investors can take in local companies. This raises the inquiry of what the economic effects of such demands are. Probably the most comprehensive informations on international joint ventures come from the U. S. Department of Commerce benchmark studies.
While they are non representative for the universe as a whole. these informations still offer information on long-term tendencies in international joint venture activity for one of the most of import beginning states of FDI. Harmonizing to Desai. Foley and Hines ( 2004 ) who have examined these informations. about 80 per centum of all U. S. affiliates abroad in 1997 were entirely owned. with the staying 20 per centum every bit divided between minority- and majority-owned affiliates. The ownership portion is positively correlated with host state gross national merchandise ( GNP ) . In the richest quartile of host states. partly owned affiliates accounted for merely 15. 5 per centum. whereas in the poorest quartile they made up more than half of all U. S. foreign affiliates.
The information exhibit considerable fluctuation in ownership portions across industries and over clip. In the last 20 old ages at that place has been a downward tendency in minority-owned and an upward tendency in majority- and entirely owned affiliates. partially due to alterations in U. S. revenue enhancement Torahs. Profit-maximizing joint ventures See a transnational house contemplating a foreign investing undertaking that requires a combination of its ain assets and those of a local house in the host state. What is the appropriate ownership construction of the undertaking? The extended literature on this issue starts from the premiss that the ownership construction is a response to the presence of market failures ( or high dealing costs ) in plus markets. This can best be
World Economy Joint Ventures 2 understood by presuming – counterfactually – that there are no such failures. This is the instance. if ( I ) all assets and other inputs to and end products from the undertaking are discernible and verifiable by 3rd parties. such as tribunals ; ( two ) it is possible to compose contracts stipulating the proviso of each input. and the distribution of end product and net incomes under all possible eventualities ; and ( three ) these contracts can be enforced at no cost. Under these ideal conditions. the ownership construction is undetermined. since the houses can merely utilize contracts to organize the usage of their assets. Such ideal conditions are improbable to predominate in pattern. Suppose. for illustration. that the undertaking requires a combination of the multinational’s production engineering and the local firm’s selling know-how. It may be really hard to stipulate what these assets entail. to measure how valuable each plus will be for the undertaking. and therefore to compose a contract on what each party has to lend and how net incomes are to be shared.
Even if the two parties both knew how of import the engineering and the selling know-how were. it would be following to impossible for a 3rd party to verify this and hence to find whether both parties have fulfilled their contractual duties. It may besides be impossible through contractual agencies to forestall spillovers of the engineering to the local house which could so utilize it for its ain intents. Stipulating appropriate direction contracts to guarantee that net incomes from the undertaking are maximized may be hard particularly if monitoring costs are high. In short. contracts will by and large be deficient to forestall timeserving behaviour. Retaining ( partial ) ownership of assets. and therefore residuary rights of control over them. may so be preferred because it ensures that a house will obtain at least some return from the undertaking and therefore have an inducement to lend assets to the undertaking and supply attempt in running it.
Shared ownership of an investing undertaking is merely a second-best solution. First. it may be impossible to vouch each party the full return from the usage of its assets. Hence there may be excessively small proviso of assets or deficient investing in orienting the assets to the undertaking. Second. joint ventures require important direction resources due to the demand to organize determinations between the spouses. Why so would one of the spouses. say the multinational. non merely get the other and assume whole ownership of the undertaking ( see Amalgamations and Acquisitions ) ? One obvious advantage of shared ownership is that it requires less capital than a complete take-over. Furthermore. the multinational may merely be interested in some of the assets of the local house. If these are difficult to extricate from the local firm’s other assets. a joint venture may be the better option.
Incomplete information about the value of the local firm’s assets provides another ground for shared ownership. since allowing the local house take how much ownership to retain may uncover information to the transnational. Empirically it is hard to separate between different accounts for shared ownership. since the information on which houses base their determinations is frequently confidential. In add-on. the ownership determination may be made at the same time with other determinations refering the firm’s operations. Desai. Foley and Hines ( 2004 ) therefore usage alterations in U. S. revenue enhancement Torahs impacting ownership and the liberalisation of local ownership demands to place possible interactions between these determinations. They find a complementary relationship between the ownership portion of the transnational and the sum of intra-firm trade between the affiliate and the parent company. Firms that trade more internally are more likely to hold whole or bulk ownership. whereas affiliates selling more of their end product or purchasing more of World Economy Joint Ventures 3 their inputs locally are more likely to be organized as joint ventures.
Possible grounds for this are that whole ownership reduces the cost of organizing intra-firm minutess and makes it easier to put internal transportation monetary values to avoid revenue enhancements. Host state policy Local ownership demands are most often imposed by developing and passage states. although some high-income states besides put bounds on foreign ownership in certain sectors. Possible economic principles for necessitating local equity engagement in low-income states are that they might ease spillovers of engineering and direction know-how to local houses. and may procure a portion of the project’s net incomes for the host state when the financial system is excessively inefficient to make this straight through revenue enhancements. Some writers argue that multinationals. excessively. may hold an involvement to take on a local spouse to smooth dealingss with the host-country authorities and cut down the hazard of expropriation.
Foreign Direct Investment. Amalgamations and Acquisitions Further Reading Asiedu. Elizabeth. and Hadi S. Esfahani. 2001. Ownership Structure in Foreign Direct Investment Projects. Review of Economics and Statistics 83. 647-662. Caves. Richard E. . Multinational Enterprise and Economic Analysis. 3rd erectile dysfunction. . Cambridge: Cambridge University Press. 2007. Desai. Mihir A. . C. Fritz Foley. and James R. Hines. 2004. The Costs of Shared Ownership: Evidence from International Joint Ventures. Journal of Financial Economics 73. 323-374. Muller. Thomas. and Monika Schnitzer. 2006. Technology Transfer and Spillovers in International Joint Ventures. Journal of International Economics 68. 456-468. Nakamura. M. . and J. Xie. 1998. Nonverifiability. Noncontractibility and Ownership Determination Models in Foreign Direct Investment. with an Application to Foreign Operations in Japan. International Journal of Industrial Organization 16. 571-599. Stahler. Frank. 2005. Partial Ownership and Cross-Border Mergers. University of Otago Economics Working Paper 0522. ( hypertext transfer protocol: //divcom. otago. Ac. nz/econ/research/discussionpapers/DP_0522. pdf ) Horst Raff Department of Economics. Christian-Albrechts University of Kiel