Working Paper: NBER ID: w14515
Authors: Yongmin Chen; Ignatius J. Horstmann; James R. Markusen
Abstract: There exist two approaches in the literature concerning the multinational firm's mode choice for foreign production between an owned subsidiary and a licensing contract. One approach considers environments where the firm is transferring primarily knowledge-based assets. An important assumption there is that the relevant knowledge is absorbed by the local manager or licensee over the course of time: knowledge is non-excludable. More recently, a number of influential papers have adopted a property-right view of the firm, assuming the application abroad of physical capital, the owner of which retains full and exclusive rights to the capital should a relationship break down. In this paper we combine both forms of capital assets in a single model. The model predicts that foreign direct investment (owned subsidiaries) is more likely than licensing when the ratio of knowledge capital to physical capital is high, or when market value is high relative to the book value of capital (high Tobin's-Q).
Keywords: Foreign Direct Investment; Outsourcing; Knowledge Capital; Physical Capital; Multinational Firms
JEL Codes: F2; F23; L2; L22; L24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| physical capital intensity (E22) | licensing (outsourcing) (L24) |
| knowledge capital intensity (E22) | establishing subsidiaries (internalizing) (F23) |
| physical capital ownership (E22) | agent's effort (L85) |
| Tobin's q (G19) | establishing foreign subsidiaries (F23) |
| stronger protection for knowledge capital (O34) | licensing relative to FDI (F23) |
| physical capital ownership (E22) | use of knowledge capital privately (D29) |