Mode of foreign entry, technology transfer, and FDI policy

• DOI: 10.1016/j.jdeveco.2003.08.002
• Publication Date: 2004-06-09T20:23:03Z
• Authors: Aaditya Mattoo; Marcelo Olarreaga; Kamal Saggi
• Keywords: Technology Transfer

Abstract Foreign direct investment (FDI) can take place either through the direct entry of foreign firms or the acquisition of existing domestic firms. The preferences of a foreign firm and a welfare-maximizing host country government over these two modes of FDI are examined in the presence of costly technology transfer. The trade-off between technology transfer and market competition emerges as a key determinant of preferences. The clash between the foreign firm's equilibrium choice and the local government's ranking of the two modes of entry can provide a rationale for some frequently observed FDI restrictions.