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Financing and Mode of Entry in Foreign Markets

Jain, N. (2016). Financing and Mode of Entry in Foreign Markets (Report No. 15/16). London, UK: Department of Economics, City University London.

Abstract

We study the mode of entry decision of a multinational firm with and without financing constraints on the local firm. We find that the local firm's financing constraints lead to an increase in the multinational's profits from joint venture for all possible beliefs about demand, while its profits from foreign direct investment decrease if the probability of high demand is low but increase otherwise. Examples show that joint venture arises for a larger set of beliefs when the local firm is financially constrained. The relative profitability of joint venture increases as technology transfer increases, fixed cost of entry increases and the multinational's cost advantage decreases. Further, optimal contract in the joint venture without financing depends on parameter values and displays novel features, leading to a discontinuous expected profit function of the multinational. Financing considerations restore uniqueness of the contract and continuity of the profit function. In contrast, the multinational's expected profits in FDI are continuous in its belief when there is no financing but are discontinuous with financing, due to features of the financial contract between the local firm and a lender.

Publication Type: Monograph (Discussion Paper)
Additional Information: Copyright 2016, the author.
Publisher Keywords: Multinational, Joint venture, Financing, Contracts
Subjects: H Social Sciences > HG Finance
Departments: School of Arts & Social Sciences > Economics > Discussion Paper Series
URI: http://openaccess.city.ac.uk/id/eprint/13888
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