A model of coexistence of international joint ventures and foreign wholly-owned subsidiaries

It is common that multinational enterprises (MNEs) operate both wholly-owned subsidiaries and joint ventures in a foreign country. The latter is especially interesting for those jointed by MNEs and local firms. There are numerous cases for Japanese multinationals in the United States operating both types of affiliates. This paper uses a general equilibrium model of monopolistic competition to explain this phenomenon. In addition to the benefits of firm-specific knowledge which is a `public good' within a firm, the MNE compares the advantage of more advanced technology with a lack of plant-specific knowledge in the host country in order to make the decision. The difference between firm-specific knowledge and plant-specific knowledge is that the former is transferable within a firm while the latter is non-transferable. The variation in production costs among different plants within a firm may explain the coexistence of different types of affiliates in a country.