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Optimal Degree of Foreign Ownership under Uncertainty
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Abstract
This paper studies the integration strategies of multinational firms in a multiperiod
model under incomplete contracts and uncertainty. I incorporate continuous
levels of integration to the study of organizational choice in an existing
model of foreign direct investment (Antras and Helpman, 2004) and extend the
model to a multi-period framework of learning. The joint productivity of the two
partners in an integrated firm is unknown initially to both sides and is revealed
only after continued joint production. The model gives rise to a nondegenerate
distribution of foreign ownership at the firm level and shows that the optimal
level of integration rises with the age of the firm. These patterns are supported
by detailed plant-level data on share of foreign ownership. The model predicts
that the degree of foreign ownership is an increasing function of joint productivity
and intra-firm trade should rise over time as a result of increased control by
multinationals. I test the implications of my theory with plant-level data from
Turkey and find support for the predictions of the model.partial ownership, vertical integration, multinationals, uncertainty