Host country's strategic policies and multinational firm's choice of entry mode

This paper examines the effects of contract enforceability and market structure on a firm's choice between licensing and foreign direct investment. Clearly, the firm's choice impacts upon social welfare in the host country. Therefore, the government of the host country is likely to set contract enforceability for inducing the multinational firm (MNF) to choose a desirable mode of entry. The paper takes into account two different cases. In the first case, the host country does not have an incumbent that can compete with the MNF, and in the second case, it has one incumbent that can compete. The paper shows that the government's choice of contract enforceability is crucially dependent upon the domestic market structure and the domestic capacity to absorb the advanced technology of the MNF. ► Strategic policies of host government and multinational firm's choice of entry mode. ► Effects of contract enforceability and market structure on a multinational firm's choice. ► Host government prefers licensing to FDI when the country does not have an incumbent. ► The firm prefers licensing contracts with the incumbent when there is an incumbent. ► The government induces the firm not to choose contracts with the incumbent.