The Choice between Joint Venture and Wholly Foreign-owned Subsidiary: A Political Economy Approach
Existing studies of foreign direct investment (FDI) entry modes focus on factors shaping investors’ choice between joint venture (JV) and wholly owned subsidiary (WOS), with policy bias from host country government assumed as given or unitary. We relax these assumptions to examine how variations in decision making by gatekeepers at different levels of the government affect the organizational forms of FDI in China, where national policies have been biased toward JVs, yet WOSs have nevertheless been growing – largely as a result of local governments’ bending the rules. Based on a simple game-theoretic model about investor-gatekeeper negotiations between foreign investors and gatekeepers, we posit that the national government tends to have greater bargaining power with investors than local governments to maintain the policy bias, which is not necessarily consistent with the preferences of local governments. The extent to which local governments deviate from this bias because of weaker bargaining power and/or preference inconsistency, however, depends greatly on their information asymmetry and bargaining power with the national government. We formulate several hypotheses and test them with industrial census and local public finance data. The results of analysis suggest that intra-governmental fiscal relations and controls offer useful clues to understanding the organizational patterns of FDI entry.
Keywords: Entry mode, foreign direct investment, FDI policy, fiscal decentralization, political economy
FDI and Market Structure in China: Empirical Evidence from the Industrial Sector, 1998-2007
This study uses a unique panel data set to investigate the impact of foreign direct investment (FDI) firms on China’s domestic market structure. Estimates from system-GMM dynamic models yield three major findings. First, the overall impact of FDI on industrial concentration is statistically insignificant. Second, there is a significantly nonlinear (U-shaped) pattern of the impact from FDI, with concentration attenuated or enhanced by incipient or strong presence of foreign-invested firms respectively. Third, the impact of joint ventures is significantly negative relative to that of wholly owned subsidiaries. The overall evidence on the effect of FDI firms differs from that seen in developing economies but is similar to that seen in developed economies, probably due to a buffering effect from state-owned enterprises and the government’s gradualist approach to market opening. The U-shaped pattern reflects a diluting effect of FDI on domestically concentrated industries and a consolidating effect from FDI buildup in competitive industries. The organizational diffusion effect of joint ventures provides new evidence on the relationship between proprietary assets protection and spillovers.
Keywords: Foreign direct investment (FDI), market structure, concentration, joint venture, China