Abstract This paper explores a striking empirical pattern that has gone unnoticed in the literature: U.S. multinationals' majority-owned ventures abroad are more profitable than their minority-owned and 50-50 joint ventures. On average, majority-owned foreign affiliates in manufacturing earned a 6.4% return on assets in 1977-2003, compared to 3% for other U.S. affiliates abroad. This pattern is found across most sectors and countries. We explain these findings with a new theoretical framework that views both the ownership structure and the profitability of a foreign venture as functions of the value created by the ownership-specific capabilities that the MNC brings to a host country. These capabilities can give it a competitive advantage against the local firms. Where these capabilities are strong, the MNC is likely to choose whole or majority ownership; its profits are also likely to be highest in these activities. Where the firm's capabilities are weak, it is likely to seek additional capabilities from local firms through a joint venture; these investments are also likely to yield lower profits. We test these theoretical predictions by constructing measures of the revealed international competitive advantage of U.S. MNCs. Our analysis confirms that the profitability gap is significantly higher in sectors where U.S. MNCs are more competitive. We also test for the possible effects of affiliate size, age, non-dividend payments and host country characteristics including tax rates, GDP per capita and policies towards foreign direct investment
